If you invest in stocks, you may have noticed that some companies opted not to declare a dividend over the last few quarters.
According to the Governor of the Bank of Jamaica (BOJ), Richard Byles, based on the volatility of the prevailing financial times, this is a sign of maturity on the part of local companies.
For instance, NCB Financial Group (NCBFG), despite reporting consolidated net profits of $39.9 billion for its financial year ending September 30, 2022, opted not the pay dividends to shareholders, citing “strong heads” in the future.
JMMB Group, which posted $3.63 billion in net profit, recently declined to pay dividends to its shareholders. The company said its business lines had been adversely impacted by the prevailing high inflationary and high-interest rate environment.
For the NCBFG, the directors said it is more prudent, at this time, to continue bolstering the group’s capital in light of the Russia/Ukraine war, the “central bank rate increases – which could impact our capital – along with new insurance accounting rules and the implementation of Basel III.”
Many shareholders have been pressing for companies to pay out, as dividends form part of their income, especially in retirement.
However, speaking at the central bank’s Quarterly Monetary Policy Press Conference last week, Governor Byles outlined: “It is quite mature of them to be taking these decisions” to not pay dividends at this time.”
“I think that over the years, especially since the mid-90s coming up, our financial institutions have not only matured but [have] also strengthened their capital, their risk management and compliance and as a result of that, they are automatically taking these prudent decisions without the supervisor coming in and saying ‘guys your capital is too low you can’t pay out dividends,'” Byles said.
He continued: “They are themselves making these assessments, and it speaks to the growth in the maturity of the financial sector.”
Deputy governor Dr Jide Lewis also sees the move to halt the payout of dividends as prudent, especially given the transition from credit risk to market risk since the pandemic, “where you [had] a sudden stop of economic activity…impairing how borrowers could repay their loans,”
The central bank, therefore, expects licensees to be “forward-looking in their assessment of risk,” Lewis said.
“So far, our financial intuitions have been very prudent which is to take the buffer profits that they have made in previous periods and use that to bolster their capital instead of paying out a dividend to ensure that they have enough in their storehouses to deal with the headwinds that are ahead,” Lewis said.
He said the central bank is observing the market “very carefully” and is “so far we are comfortable with the actions that they are taking in their own best interest.”
Marian Ross, executive director of Sterling Asset Management
Financial leaders all seem to be on the same page, but who explains this strategy to the shareholders? What does this mean for their investments?
Sterling Asset Management’s Marian Ross explained to Loop News that there is really quite a lot to consider.
“It is not so simple,” Ross said.
For one, “I think what shareholders have to realise is that there is a trade-off. The more dividends you [the company] pay, the less growth you’re going to experience in the future, in theory,” she said.
“Just like you and I, if you are paid $100 for the month and you say I am going to spend $80 and save $20, whether you save $20 or $40 will affect your life in the future because the person who saves $40 is likely going to be able to retire earlier, have a bigger investment portfolio and will enjoy the fruits of the labour further on,” she reasoned.
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She suggested that investors who want a guaranteed stream of income instead look to bonds.
Investors should also remember that if the company does well, they will also eventually benefit, she said.
“You buy into the growth of the company… companies are custodians of capital…they can’t just go and spend off [pay out] the money because they have it,” Ross explained.
Other reasons she posited are that financial institutions have to preserve more capital because accounting rules have changed in a way to force them to take unrealised losses through their balance sheets as well as that the company may be planning an acquisition and needs the capital.
“So, as a shareholder, you have to take a long [term] view,” she suggested.
What seems to have been lacking, therefore, is the effort on the part of some companies to explain the strategy of properly delaying the payment of dividends to shareholders.
For Byles, companies owe their shareholders an explanation either way.
“That explanation applies right across the market to everybody. I don’t think any institution should be shy about telling their shareholders what the situation is,” he said.
By Tameka Gordon