A deterioration of fundamental business dynamics is expected to adversely affect the dividend payment capacity of the listed companies over the medium term. Declining profitability is expected to deplete the capacity of companies to disburse monetary payouts, where downside to dividends are expected, particularly from rising finance costs and debt servicing outflows. This convergence of ‘bottom-up’ negatives accompanied by slowing volumes and general decline in market activity, could relegate companies to augment non-cash payouts when faced with cash flow pressures, particularly in the form of bonuses shares.
Already, CY18 todate total stocks issuing bonus shares has climbed to 43 from 25 in CY17, where the reduction in tax on bonus shares has been the major catalyst, while total issuance remains below 52 recorded in CY13. Issue of bonus shares can be seen to have a limited impact on market capitalization, while remaining extremely difficult to forecast, analysts highlight the extended role they may play in keeping index heavyweights Banks and Cements in the limelight.
Total bonus share issues have been on a receding trend, largely due to the Government of Pakistan (GoP) raising taxes on issuance, reducing the relative impact on shareholder returns. The reversal of this levy has raised the total number of bonus shares issues in CY18. These trends can be seen prominently in some index heavyweight sectors (Banks) and the cyclical space (Autos and Foods).
The banking sector is likely to revert back to bonus issues from cash dividends, contemplating tightening requirement of capital ratios (CY19F CAR requirement: 12.5% plus DSIB buffer), and potential pressure on CAR due to an expected increase in loan delinquencies (CY19 NPL growth estimated at 7.5% as compared to 3-year average of 4.2%) and implementation of IFRS-9. Cash dividends by the sector in the crisis period of CY08 dropped to around Rs20 billion from Rs24.5bn in CY07.
In the manufacturing space, analysts believe demand slowdown and pressure on margins would negatively impact operating cash flow generation particularly in Cements, Consumers and Autos. Cement manufacturers would additionally incur higher cash outlay requirements to finance debts on expansions and diversification which might push these companies particularly in North for bonus issues as against historic preference for cash dividends.
To highlight, free cash flow of the cement companies is expected to decline to Rs5.04 billion in FY19 and Rs1.3 billion in FY20 as compared to Rs37 billion in FY18. In the consumer sector, back in CY08-09 about 30-40% dividend paying companies used to announce bonus issues whereas currently, only TREET follows this trend. Auto sector dividend mix has been most hit post imposition of bonus tax issues with companies like AGTL, ATLH and MTL switching to cash dividends, crossing over historic trend of bonus issues.
While bonus shares can be seen to have a limited impact on market capitalization (as prices adjust lower, ex-bonus) they are responsible for adding depth to market (rising volumes). Moreover, while bonus issues remain extremely difficult to forecast (can be issued without cash or capital outflow), analysts highlight the possible role they may play in keeping index heavyweights Banks and Cements in the limelight.
In Pakistan market investors’ welcome issue of bonus shares and consider them a money making option. The general perception is that bonus shares are cost free and one can make substantial gain by selling them. It is also observed that price of shares of companies rise significantly after the announcement of issue of bonus shares. However, a question arises, does bonus shares boost income of shareholders?
Some of the equity analysts are of the view that issue of bonus shares in not a divided but simply conversion of reserves into shares. Therefore, those selling bonus shares are not making any profit but diluting their holding/stake in the company.
Some analysts also believe that highly leveraged companies (carrying very high debt) prefer to issue bonus shares to borrow more from the financial institutions. Sponsors pledge bonus shares and get more funds from the financial institutions.
Over the last many months Pakistan Stock Exchange has been witnessing bearish spell. Along with foreign portfolio investors local institutional and high net worth have been constantly liquidating their holding. Number of new listing has remained dismal. It is also feared that number of companies declaring dividend will also decline substantially.
It is necessary to reiterate that the Government of Pakistan should list the profit making state owned enterprises at Pakistan Stocks Exchange (PSX) without any further delay and offer at least 10 percent shares of these entities to general public.
It is also necessary to demand that the government should reduce the tax rate on listed companies to less than 15 percent to encourage the sponsors to convert private limited companies into public limited companies.