Should You Rejoice over 100% Dividend Payout Policy?

2018 valentines day was indeed a happy day for Carlsberg Malaysia shareholders as the board formally announced a new dividend  policy whereby Carlsberg Malaysia will pay 100% of its net profit to shareholders moving forward.

In fact, it has paid average 100% or more of its net profit in the past 3 years (2015 -2017), hence the announcement was basically to formalize the new dividend payout policy.

Can Carlsberg Malaysia afford to pay out 100% of its net profit?

1) It is in net cash position ( cash balance > debt balance) in 2017.

2) Healthy current ratio (current asset > current liabilities) of more than 1x in 2017.

3) Strong free cash flow position ( operating cash flow > capital expenditure) in 2017.

4) Business is relatively stable and not highly cyclical, although subject to seasonality like festive season. When economy is bad, people may even drink more.

5) No material litigation against the company but bear in mind it has RM55 mil of custom duty or tax liability if it crystalize.

Based on the above, it seems like Carlsberg Malaysia is in a position to adopt 100% dividend payout policy. 

   Source: Dividend.com

However, not all is rosy with 100% payout ratio. If a company's profitability declines, there could even be a possibility of dividend cut.

Hence, while shareholders rejoice over the 100% dividend payout policy, close monitoring on its future business performance is still critical to assess if the payout is sustainable over the long run, especially if it pays above 100% of its net profit on prolonged basis.

Should Dividend Investors be Worried on Rising Interest Rate in US?

Dow Jones Industrial Index (DJIA) plunged more than 1,000 points on 8 February 2018 and various media highlighted the concerns on rising inflation plus rising interest rates in US being the cause of the stock market decline.

The decline in global stock market again validate the idea that some investors succumb to herd mentality and swayed by emotions brought by the volatilities in the stock market.

Rising US interest rate will cause US government bond yield to increase (higher bond yield means lower bond prices), thus decrease the attractiveness of dividend yield stocks, hence investor should sell their dividend stocks,, do you agree? 

The above is the statement that you may have read from various media, what happen if we let go of our independent thinking and follow the media? we will be in for a roller coaster ride, not a good idea.

Firstly, dividend investor who aims to live off dividend income, should ignore any short term noises in the stock market. Why is that so?

1) If US inflation and interest rate increase due to stronger underlying economy i.e. low unemployment rate, robust wage growth. Isn't this a good news to equity investor in the long run?

2) If economy performs well and US consumers increase their spending on goods and services, isn't this a good news to equity investor in the long run?

3) If global economy has a synchronized recovery, thus higher inflationary pressure after many years of low interest rate and subdued inflation, isn't this a good news to equity investor in the long run?

4) If better economy translates into better company's profitability, even if dividend payout ratio remains the same, investors will benefit from higher dividend income due to higher dividend per share on the back of higher earning per share, isn't this a good news to equity investor in the long run?

Ultimately the key factor for dividend investor to assess will be the competitive advantage of the business that we are investing in, no doubt higher interest rate may cause increase in cost of borrowings or cost structure and thus impact a company's bottom line, what if the company engages in effective hedging policy or having large portion of fixed rate borrowings or possess pricing power to grow its profitability in the long run amidst higher interest rate environment?

To name a few, If companies such as Procter & Gamble (P&G), Coca Cola, 3M, Colgate Palmolive and Johnson & Johnson (J&J) are able to increase its annual dividend payout in the past 50 over years over various interest rate cycle, really the key focus for income investor is to search and invest in companies with the prospect of increasing its profitability and dividend payout in the long run.

What about the share price?

It will take care of itself for a strong fundamentals company in the long run.