Published March 23, 2009

S'pore dividend yields seen falling this year

Analysts expect cuts amid pressure on corporate earnings

By OH BOON PING

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LAST year's dividend yields among many Singapore stocks rose to their highest levels in five years due to the plunge in stock prices - but analysts expect yields to come down this year.

The increase was broad-based, with almost all of the 30 stocks in the Straits Times Index reporting sharply higher yields in FY08 based on the last traded prices for their fiscal years.

For example, Neptune Orient Lines (NOL)'s dividend yield was 12.5 per cent, up sharply from 2.05 per cent in 2007 and 1.91 per cent in 2006, while Sembcorp Industries yielded 6.47 per cent, versus 2.22 per cent a year earlier.

Singapore Airlines returned 8.88 per cent, compared with 3.17 per cent previously, while CapitaMall Trust delivered 8.09 per cent - up from 4.11 per cent in FY07 and 3.51 per cent in FY06.

The picture is similar for non-index stocks. For example, most mid-caps raised their dividend yields.

Guocoland yielded 7.02 per cent in 2008, up from 3.09 per cent in FY06 and 1.42 per cent in 2007. And Hotel Properties yielded 4.46 per cent, up from 0.61 per cent in 2007 and 0.93 per cent in 2006.

The spike in yields came about mainly because of the plunge in stock prices, as equity markets were hammered by the financial and economic slowdown.

Last Friday, the Straits Times Index closed at 1,596.92 points - down from 2,824.91 points a year ago.

But yields are likely to be pared this year as companies cut back on cash payouts amid uncertain economic conditions.

For example, DMG reckons 77 per cent of the stocks that it covers will post lower yields, falling from an average of 6.6 per cent in 2008 to 5.4 per cent this year.

OCBC Investment Research (OIR) head Carmen Lee reckons that companies will seek to preserve cash 'as visibility on a credit thaw and the final verdict on global financial institutions have yet to crystallise'. OIR had earlier forecast an average yield of 7 per cent for STI component socks.

Also, scrip dividend programmes may become more common as companies use them to shore up cash, said Terence Wong of DMG & Partners. Stocks that have already done so include OCBC, Midas, Raffles Education and Keppel Land.

The less-than-rosy forecast came as a number of high-yielding stocks slashed payouts last year. 'ComfortDelgro, for example, only dished out 52 per cent of its earnings - a far cry from the 80-plus per cent payout in previous years. Others, like Keppel Corp, SembCorp Industries and SembCorp Marine, have also reduced their distribution to shareholders.'

DMG believes that dividend payout ratios this year will be similar to those in 2008 across most industries, given that many companies cut them last year. But 'what will take the wind out of the yields will be declining earnings per share, as we expect the market to fall some 14 per cent'.

Sectors that will see severe cuts in yields include real estate investment trusts (Reits) and finance, it says. By DMG's estimates, yields on Reits could fall 3.4 percentage points, while finance sector returns could drop 2.9 percentage points.

For the banks, DMG expects DBS to slash its dividend payout from 64 per cent last year. Accordingly, dividend yield is forecast to drop to 3.9 per cent from 9 per cent.

The yield on OCBC may drop from 6.6 per cent to 4.2 per cent, while UOB may slash its payout to give a yield of 5.4 per cent, down from 6.6 per cent.

As for Reits, the research house does not rule out the possibility of 'downside pressures to DPU in the near-term'.

'As such, we recommend investors to buy into the big-cap Reits, for example, A-Reit and CMT, as a considerable amount of their FY09 distributable income has already been locked in.'

Other sectors that will see weaker yields include multi-industry (minus 1.7 percentage points), offshore and marine (minus 0.9 percentage points) and healthcare (minus 0.4 percentage points).

OCBC thinks cyclical sectors such as property, commodities, tech and, oil and gas may have difficulty maintaining payouts, as cash flow will be affected if earnings fail to hold up.

The research house recommends investing in blue chips 'as these have largely maintained the stance of paying dividends as long as cash flow is strong and if cash is not required for major acquisitions'.