May 20, 2012 / Proshare Research
 

Stock markets over the years have provided a veritable avenue for well known companies to raise new capital much more easily than they could try to otherwise, just by selling new stock issues to the wide public.
 

Those who bought were almost exclusively those who had enough wealth and income that they could afford to take the risks involved in the expectation that they would then share through dividends paid on the stock in the profits made by the companies whose stock they bought. This worked up until the banking consolidation exercise of 2004-2007 which opened up the market to a larger number of retail but unsophisticated investors who saw dividend payments as an answer to the money markets.
 

Over the ensuing years, and post the market crash, companies are now increasingly financing their new investments out of profits that they retain rather than paying it out in dividends.
 

So the stock markets now exist largely to facilitate trading in outstanding issues of companies stock. In effect, stock market prices are now determined largely by speculators seeking capital gains.
 

For a market that has traditionally been assessing value from dividend payments, the current bearish trend challenges this paradigm.
 

Investors who expect to enjoy capital gains arising from share price appreciation on their investments now face a reversal of expectations. We ran a screen on capital gains/dividend per stocks for those with bearish sales trends.
 

Analysis revealed that out of the forty (40) quoted companies listed between 2008 and 2010, thirty-seven (37) firms are trading below their listing prices while only three (3) stock are trading above their listing price.
 

Starcomms Plc led the chart with -96.51% price declines in relation to its listing price while Daar Communications and Omatek Plc followed closed with -90.48% and -90.27% respectively.
 

However, Pinnacle Point Group, Capital Hotel and McNichols Plc all recorded price appreciation of +10.14%, +4.31% and +4.08% respectively after their listing on the bourse.

Despite majority of the quoted companies recording price depreciation, some quoted firms rewarded investors with cash dividends or bonus shares which helped compensate for the capital losses recorded as a result of the wholesome price depreciations on the bourse.
 

To the naked eye, the difference between an investment returning say 15% per annum and the one returning 17% per annum may not look like much in the near term. But as the time horizon increases, the difference keeps getting bigger.

For instance, after 10 years, the investment yielding 17% per annum will have accumulated nearly 20% more money than the one with 15%. And after 20 years, the difference would have gone up by as much as 40%. 

Thus, when it comes to investing, even a couple of percentage points of extra returns matter. However, we routinely encounter cases where investors turn a blind eye to these facts. Nowhere is this more evident than in the case of dividends paid out. Ask most (retail predominantly) investors and they will say that they invest in stocks only because of the capital appreciation potential of the same. Dividends are seldom the decision drivers. However, from the example above shows, such investors are likely to end up paying a significant price for their dividend negligence over the long term. 
 

In 2010, out the eighty-four (84) companies that declared dividend or bonuses, forty-seven (47) recorded price appreciation, thirty-three (33) recorded price depreciation while four (4) closed flat. Berger Paints and Capital Hotels Plc led the gainers with +175% and +139.13% while Unity Kapital Assurance and Beco Petroleum Plc led the losers with -78.99% and -76.28% respectively.

In 2011, seventy-nine (79) firms declared cash and bonus dividends with very few recording positive share price movement. Of this number, fourteen (14) quoted firms that declared dividends recorded price appreciation, while sixty (60) firms recorded price decline, with the remaining five (5) closing flat.
 

As at April 2012, forty-nine (49) quoted firms have declared dividends of various amounts. Based on the price return analysis done on those companies as at 11^th May, 2012, twenty-one (21) of such stocks recording price appreciations while twenty (20) recorded a depreciation in share price, with the remaining eight (8) closing flat till date.

Thus, as we have seen, dividends not only help propel investment returns over the long term, they also help generate sizeable returns during periods when the stock markets go through lean times. Little wonder, dividend paying stocks remain a must have in one's portfolio. 
 

Yet this trend is changing and investors should be aware. It is time to start adjusting expectations and note that the promise of dividend in offers or private placements ahead of listings may not be guaranteed.

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