Published February 27, 2009

Dividend-rich story is waning

By JAMIE LEE

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IT MAY be a nag but a mother's reminder of 'safety first' to her kids is pretty good advice.

And in such uncertain times, people are turning maternal. They are looking for investments that they can nestle into and sleep soundly over.

Ordinarily, this would refer to dividend-rich stocks such as those in the banking, oil and gas, and the telecommunications sectors.

Which explains why several blue chips tend to find favour among analysts. Besides the assumption that shareholders are buying into an established and stable business, the stocks yield attractive dividends for shareholders.

This is despite (or a consequence of) them typically being more expensive in dollar terms compared with other stocks on the market.

But the dividend-rich story that some analysts still keep up is waning.

Oil and gas kingpin Keppel Corporation slashed its dividend payout ratio last month to 51 per cent from 99 per cent a year ago, despite posting a slight 3 per cent dip in full-year net profit to about $1.1 billion.

And while competitor Sembcorp Marine is prepared to push out a dividend of 11 cents per share for the full year, 26 per cent higher than the 8.73 cents paid in 2007, the company has noted that the dividend policy is not cast in stone. This signals that future dividends for the company could be shaved to explore mergers and acquisitions (M&A) opportunities or as a precaution against the credit crunch, as banks turn coy on lending.

Over in the US, JPMorgan Chase became the latest bank to cut dividend payout. It lopped dividend payout by 87 per cent to five US cents per share from 38 US cents, saving US$5 billion in capital per year from the reduction, reported Bloomberg. This is despite the bank expecting a profit in the first quarter in 2009 that is aligned with analysts' estimates.

Banks at home - which are assumed to be stronger than their Western counterparts - have maintained their payouts so far. But OCBC has plans to introduce a scrip dividend scheme that allows shareholders to receive the latest dividend in the form of shares instead of cash, which is seen as a means to conserve capital.

Even the real estate investment trusts (Reits) sector, which rests on a stable income distribution as its selling point, is not as resilient as some analysts make them out to be.

Saizen Reit yanked distribution payout for its fiscal second quarter and has proposed a scrip-only dividend scheme, under which it would pay dividends in the form of Reit units instead of cash.

CDL Hospitality Trusts also said that it would distribute 90 per cent of its taxable income - the minimum amount of distribution - for the second-half 2008, compared with off-loading 100 per cent of its taxable income. This would save the company about $4 million.

Analysts say that the 'scrip-only' scheme and other dividend reinvestments schemes are being mulled by other Reits as well to hoard cash. This is especially as the situation of debt maturity appears 'more acute' here compared to other Reits in the region, said DBS Vickers Securities in a recent report, with about $3.2 billion or 24 per cent of the total sector indebtedness being due for refinancing this year.

The bottom line is that stocks that paid out generous dividends in past may not necessary do so now.

Measures to crimp dividend payouts are understandable. While there is little doubt that shareholders will lose out in the short term, it would be unwise for companies to pay out cash, or worse, to borrow (at much higher costs now) and risk future operations by weakening its cash position.

But this means that stocks that were once lauded as safe, resilient or defensive based simply on their dividend yields, may no longer be seen as such.