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Dubai: High dividend payouts by Gulf companies need not necessarily guarantee high investor returns as many regional firms that pay high dividends are under-performers on the stock market, according to a recent study by Kuwait Financial Centre (Markaz).
Stock returns comprise capital appreciation and dividends. Companies in the Gulf Cooperation Council are generous when it comes to doling out dividends (both cash and stocks) as implied by the high dividend payout ratio.
"High dividend payouts need not necessarily result in high dividend yields (dividend paid by a company as a percentage of the share price) due to market price fluctuations. Companies may seem to enjoy high dividend yields more due to sharp deceleration in their share prices than sharp acceleration in dividend payouts and vice-versa," said M.R. Raghu, head of research and Layla Al Ammar Investment Analyst of Markaz in a recent study.
Following an analysis of 90 stocks listed on Gulf bourses, Markaz analysts concluded that companies that offered high dividend yields suffered from poor stock market valuations and hence had low total returns. On the contrary, companies that had low dividend yields provided higher total returns due to capital appreciation.
Portfolios
According to the study, yield stocks (stocks with high dividend yields) had some characteristics that were uniform for the group such as small size, poorly traded, poorly valued with high performance measure. Similarly growth companies (companies with low dividend yields) were generally large companies, well-traded, well-valued but with performance measures a shade lower than yield stocks.
By constructing portfolios with due weightage to both dividend yields and growth parameters, the study concludes that there is a comparative advantage in going after capital appreciation rather than dividend yields when it comes to Gulf stocks.
"Portfolio managers and investors could do well to chase returns in the form of capital appreciation than bet on dividend yields. The vote, at least for the time being, is in favour of growth stocks," said Raghu and Al Ammar.
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