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Highest dividend yield companies have small free float

Jan-07- 13, 2002

The Top 25 companies awards distribution ceremony for the year 2000 was held on December 29, 2001 by Karachi Stock Exchange (KSE). Out of 25 award winning companies, 8 companies are from textile sector, 3 each from fuel and power, chemical and fertilizers and food sectors, 2 each from auto and allied engineering and paper and board sectors and one each from cable and electric, investment and finance, tobacco and miscellaneous sectors. Six companies namely Lever Brothers, Grays of Cambridge, Pakistan State Oil Company, Shell Pakistan, Millat Tractors and Engro Chemical have been winning this award for more than ten years while 7 new companies have entered the top companies list for the first time.

The sheer predictability of the line up year after year of companies receiving this award is commendable. At the same time it is evident that most of these companies have a close shareholding pattern, which prevent small investors from reaping dividend through secondary market investment. First, in case of most of the companies very large percentage of equity is directly or indirectly held by the sponsors and there is not enough free float. Second, the trading volume of these companies is also very low. For example Lever Brothers had an average daily turnover of 3,413 shares, Grays of Cambridge 14 shares, Al-Ghazi Tractors 3,752 shares and Lakson Tobacco 1,453 shares.

With such a closed shareholding structure and low trading volume, no significant benefit seems to be accruing to investors. Even if one wants to buy shares of these companies, the prices are incredibly high. One wonders who are 'investors' reaping rich dividend from these companies. While the criterion is expected to be revised, it is necessary that it should take into account a larger shareholding structure and active trading. A high dividend payout is of little significance when major chunk goes back to only a few shareholders.

The KSE has been striving to revise and update the criteria for selection to ensure that only those companies are honoured which have not only excelled in performance but are also serving the interest of their shareholders, in the best possible manner. It has decided to amend criteria from the next year in order to further improve the corporate governance. The guiding principles laid down for selection of top companies for the year 2000 were; 40 per cent for dividend distribution (including minimum15 per cent cash dividend), 30 per cent for return on equity (before tax and 30 per cent for shares trading turnover.

The future look promising. On the external front, many developed countries have withdrawn sanctions imposed on Pakistan in 1998. Pakistan has been brought back into the mainstream of international politics. The GoP has successfully negotiated with Paris Club on the debt issue. Enhanced financial assistance approved by international financial institutions has improved Pakistan's sovereign rating. The decision of the European Union regarding withdrawal of duty on many Pakistani value added products as well as increase in quota will enhance the level of economic activity in the country in addition to increased exports from Pakistan.

Saying this much, it is necessary that the GoP should consider, reimposition of tax on reserves to maintain greater distribution of cash dividend and announce tax exemption on bonus shares. TFCs issued before 30 should continue to remain exempted from tax. There is a dire need for promulgating Takeover Law should also be promulgated at the earliest so that new and competent people may be able to come forward and turnaround perennially sick units.

Recipients of Awards for Year 2000

1- Lever Brothers Pakistan
2- Grays of Cambridge (Pakistan)
3- Pakistan State Oil Co.
4- Al-Ghazi Tractors
5- Lakson Tobacco Co.
6- Din Textile Mills
7- Shell Pakistan
8- Nishat Chunian
9- Millat Tractors
10- Fauji Fertilizer Co.
11- Rafhan Maize Products Co.
12- Javed Omer Vohra & Co.
13- Sapphire Fibres
14- Yusuf Textile Mills
15- Siemens Pakistan Engineering Co.
16- Sitara Chemical Industries
17- Kohinoor Weaving Mills
18- Cherat Papersack
19- A. A. Textiles
20- Engro Chemical Pakistan
21- Indus Dyeing & Manufacturing Co.
22- Security Papers
23- Blessed Textiles
24- Pakistan Oilfields
25- Nestle Milpak