What determines a company’s dividend policy?
Dividend policies are generally driven by the needs of the business. The stage of maturity of the company can play a role. Younger companies, which are still growing, could prefer to deploy capital in acquisitions and expansion opportunities.
Dividend policies also often differ based on tax regimes. If the tax regime is favourable, controlling shareholders could decide to distribute themselves dividend rather than pay salary.
In environments where bank funding is easy to get, companies can be more generous in paying dividends as they can turn to banks for their funding needs. This can be country and company specific. So, for example, Indian companies may choose to conserve capital rather than pay dividends because liquidity in the banking market is limited. We see a similar situation developing in China now that banks are no longer following expansionary lending policies. Companies in China may have to increase their internal funding once access to bank loans diminishes.
Has the interest in dividend stocks from your private banking clients increased since the 2008 financial crisis?
There is a history of interest in dividend-paying companies and this partly explains the popularity of stocks such as HSBC, but they have definitely gained in popularity in the last few years. Earlier, when the market was on a bull run, equity investors were more focused on capital gains. Now dividend-paying stocks are seen as a proxy for fixed income. At Julius Baer, we have focused more research, recommendations and themes on companies that have a track record of paying dividends since 2008.
But do investors understand the difference between interest income and dividends?
Yes, sophisticated investors understand that there is volatility inherent in dividend payout. But some investors may still expect companies to continue to pay dividends even in difficult economic environments. Anecdotally, this is the case with many HSBC investors who have said in the past that they do not understand why the company has cut dividends when it is still profitable.
Do you see a difference between Asia and the rest of the world in how dividends are perceived?
Shareholder expectations are something all listed companies take into consideration, irrespective of where they are based. But one difference could be because there are more family-owned companies in Asia with controlling shareholders. In some cases controlling shareholders, who are running the business as long-term owners, can afford to be less sensitive to the reaction of minority shareholders to, for example, a drop in dividends.