One of the most notable features of this earnings season has been the large number of companies that have proposed to pay special dividends. These are welcomed by investors. But unfortunately they don't say very much about the financial health of the companies that pay them. Nor do they give us an indication of management's confidence in future earnings. It is my contention that companies should avoid paying special dividends. They should either raise their ordinary dividend, or buy back shares.

A healthy, mature stock market is built on investors' confidence in the companies that are listed on them. You can see what happens when this confidence is undermined, such as during the Enron and WorldCom disasters in the US, or the China Aviation Oil collapse on the Singapore Exchange. But how do we measure the confidence of listed companies in future earnings? Given how pathetic many companies' outlook statements are (such as 'barring unforeseen circumstances we expect to have a satisfactory year') dividends are the only, but also the ultimate barometer. Management only lowers the dividend when it really has to conserve cash. Management is acutely aware that companies which lower their dividends often experience a commensurate decline in their stock prices. In order to avoid having to lower dividends, companies raise dividends only when the outlook is bright enough that the chance they will have to cut their dividends in future years is reduced. And some companies even go into debt in order to maintain dividend payments.

The flip side to this is that management is often very reluctant to raise ordinary dividends, even when it can. This is where the special dividend has been used as a tool to say, 'times are good now, but that's not going to last forever'. It may seem prudent, but in my view it is also too conservative. Companies which have sustainable earnings should pay consistently higher ordinary dividends, or buy back shares.

Fortunately, this earnings season has not yielded too many of these companies. In the month of February we covered many earnings announcements where not only special dividends were announced, but ordinary dividends were raised. It is the ordinary dividends that investors should really be looking at for an indication of the future. Going by this yardstick alone, the future looks bright.

Here's a sample:

StarHub
Star example: StarHub. Not only is it paying a final dividend of 3.5 cents per share, up from 2.5 cents last year, it will pay a special dividend or share buy-back. Details to be confirmed.

SembCorp Industries
It is paying a special dividend of 16 cents per share, on top of a final dividend of 8 cents, up from 6.5 cents last year.

Unisteel
It's paying another special dividend of 1.5 cents, on top of an ordinary dividend of 3.5 cents, up from 3 cents last year.

Vicom
It's announced a final dividend of 5.65 cents per share, plus a special dividend of 5 cents per share. This compares to 4.75 cents plus 2 cents last year.

Cosco Corp (Singapore)
Cosco Corp (Singapore) is paying a special dividend of 1.5 cents per share, in addition to a final full year dividend of 2.5 cents, compared to 2 cents last year.

These are examples where companies are not just paying a special dividend but also a higher ordinary dividend, signalling confidence.

There are two special cases that deserve a mention: ComfortDelGro and Longcheer Holdings.

Which do you think has a rosier outlook?

ComfortDelGro
ComfortDelGro is paying a special dividend of 1.5 cents per share, in addition to an ordinary dividend of 3 cents per share, unchanged from last year.

Longcheer Holdings
It is paying a higher ordinary dividend of 1.6 cents, compared to 1.04 cents last year.
But it is not paying a special dividend, like the 3.12 cents it paid last year.

Going purely by their dividend announcements I would say Longcheer is more confident. ComfortDelGro is not raising its ordinary dividend. Although Longcheer is not paying a special dividend, the fact that they have raised their ordinary dividend by 50% is a far stronger indicator of management confidence in future earnings.


Mark Laudi