Philippine Stock Market Research

July 24, 2018

Traditional High Cash Dividend Yield Stocks Take the Back Seat and Look to the Exit

Big Funds and investors rely on high cash dividend stocks to enhance their stock portfolios.  Traditionally, these are telco, power and broadcasting stocks.  They are basically slow-growth stocks or stocks that dominate a saturated market.  In recent years, they are mainly TEL, GLO, MER and GMA7.

With their generally single-digit annual growth, they make up to their shareholders’ returns through cash dividends with high yields (div/price).  These yields cover inflation and provide incremental gains as well.  They decently range from around 4% to 6% in recent years when inflation was tamer.

Funds are somewhat rattled this year as some traditional high cash dividend stocks are and may be losing their capacity to pay hefty cash dividends.  Their pay-out ratios range from 50% to 100% of previous year’s net income.  There are various reasons for this.

Despite their high capex, these stocks pay bulk of their net income as cash dividends instead of reinvesting the earnings.  As a result, they suffer from high interest expenses as debt is used to fund capex.  Examples of this are TEL and GLO.

Stiff competition is another reason.  Losing to GLO’s mobile subscriber base, TEL’s ability to pay hefty cash dividends is compromised.  GLO, on the other hand, is in the middle of a high-capex network upgrade.  The entry of a third telco also hounds the two’s future earnings and share of the telecom pie.

Meanwhile, GMA7 is hounded by the rise of social media as a vehicle for advertising.  Advertising rates are trending lower, and this was first taken big notice of from the lower political ad revenues from 2016 compared to the 2010 presidential elections.  Free TV’s dominant share of the ads pie is diminishing.

MER, on the other hand, has resorted to expanding its business to include local and overseas power generation.  This will kick in 2020 onwards when MER’s coal-fired power plants commence operations.  Of the four mentioned stocks, MER has fortified its ability to pay hefty cash dividends.

SCC is also the best stock in the coverage right now with a high cash dividend yield of around 8%.  It may be able to sustain this as the four units of its coal-fired power plants complete their maintenance and collectively resume operations in 2019.  The growing economy is also boosting SCC’s coal sales.

Investors should be alert and flexible in maintaining high cash dividend yield stocks in their portfolios.  Following tradition can cause a dent with investors stuck in slow-growth stocks with dim futures.  The PSEi’s drop in 2018 also gives opportunities for hefty cash dividend yields as share prices decline.

The strategy with cash dividends is the same with stocks.  It is to acquire value stocks at the lowest price possible.  Back in 2010, we had a Strong Buy with AEV and AP as they established five new power plants spanning 2009 to 2011.  The cash dividend yield derived from them now is above 20% per annum.

2018 may be a bore to the market, but it is an exciting time for us.  It is fertile ground to establish cash dividend yields similar to 2010 AEV and AP.  It is the year to pick high-growth stocks devoted to paying cash dividends.  This is when investors start letting money work for them big time in the long run.

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