Saturday, December 27, 2008

More On The Flip-Flops Of Proposed Dividends.

Highlighted the other day: Chin Well Cancels Dividends

On today's Star Business, there's a long article from Erral Oh,
Divided over dividend payout


  • Saturday December 27, 2008
    Divided over dividend payout
    By ERROL OH

    At AGMs earlier this week, the majority shareholders of oil palm grower Tanah Emas Corp Bhd and nuts and bolts maker Chin Well Holdings Bhd voted against the payment of dividends declared earlier. The shareholders, who are also directors, cited deteriorating industry and economic conditions and the need to hold on to cash. Did they do the right thing? C.S. TAN and ERROL OH look at both sides of the coin.

    Change of heart should have been made known earlier

    By Errol Oh

    THERE are a couple of things about the recent developments at Tanah Emas Corp Bhd (Tanahmas) and Chin Well Holdings Bhd that are undisputable. First, no different from any other shareholder, the majority shareholders have every right to vote for or against the dividend resolutions.

    In fact, by saying nay to the dividends, they are denying themselves a fair bit of income.

    Second, the reasons given for the majority shareholders’ rejection of the resolutions are solid. We are indeed in the middle of a global economic slowdown and a commodity slump, and RM11mil (in the case of Tanahmas) and RM8.2mil (Chin Well) in cash will certainly come in handy when things get rougher.

    However, there are some other aspects that are open to debate. There is the question of timing. At what point did the majority shareholders decide that they it was best for the companies not to distribute the dividends?

    The two companies separately declared the dividends in August.

    In late November, both companies issued their respective AGM notices, which indicated that the resolutions for the dividend payments will be tabled at the meetings. The notices of book closure, setting out the relevant dates for the distributions, also came out at the same time.

    The minority shareholders couldn’t have possibly seen anything out of the ordinary. It was all routine stuff so far.

    Then came the AGMs – Dec 22 for Tanahmas and Dec 23 for Chin Well. That was when the majority shareholders showed their hands. It’s absurd to think that they showed up at the meeting still undecided on which way they would vote. The decision to halt the dividends would have been made much earlier.

    A probable catalyst was the turbulence in the world economy and the stock market in October. If that’s so, why not communicate to the market the change of heart and the intent to shoot down the dividend resolutions?

    Under Bursa Malaysia’s listing requirements, a company can’t alter the dividend entitlement once the dividend has been declared. So, it was not an option to withdraw the resolution.

    Still, the majority shareholders could have earned some goodwill by immediately signalling what it had planned to do at the AGMs.
    People do not like to feel that they might have been misled. Nor do they fancy finding out so abruptly that the dividends they were counting on are not to be.

    Bear in mind that the majority shareholders have representatives on the board of directors, including those in an executive capacity.

    This is precisely the type of situation that provokes questions about the wisdom of majority shareholders having a big say in a company’s management. When do they act as majority shareholders and when do they act as stewards?

    Sure, there’s a fine balance between rewarding shareholders and safeguarding a company’s interests. But there’s also the delicate task of managing shareholder expectations.

    The flip-flop has cast unflattering light on the other directors.
    Did they have prior knowledge of the majority shareholders’ intention to nix the dividend proposals? If they did, aren’t they obliged to announce it? If they didn’t, they knew no more than the minority shareholders, and that’s hardly comforting.

    Proposal not castin stone untilapproval at AGM

    By C.S. Tan

    CHIN Well Holdings Bhd proposed a first and final tax-exempt dividend of 3 sen a share in August.

    Two months later, the financial world changed in such a way that even those who do not follow it every day noticed it.

    Stock markets plunged everywhere, making the news on front pages.

    The markets mirrored the conviction of investors that the global economy would get a lot worse before it could get better.

    In October, the Dow Jones Industrial Average fell 14% to below the psychological level of 10,000 while the Kuala Lumpur Composite Index fell 15% in that month. Since then, weak data has come out from companies, industries and economies in all the developed countries.

    It explains the series of cancellations of proposals from purchases of commercial properties to takeovers and also to dividends.

    Institutional investors and analysts expect companies to maintain their ordinary dividends while special dividends can be discontinued.

    That, however, should apply only to “normal conditions.” Investors should expect that companies are likely to cut their dividends at this time.

    Blue chip companies hesitate to do so for fear of a sell-off in their shares should they cut their dividends, but between that and ensuring they survive the recession, long-term survival should have priority.

    So far, only two lower tiered companies have cancelled their dividend proposals and both did so at their AGMs last week.

    Plantation company Tanah Emas Corp Bhd did so on Monday, followed by nuts and bolts manufacturer Chin Well on Wednesday.

    The rejection of their proposed dividends came as a surprise to the market in terms of the manner and abruptness in which it was done.

    The dividend proposal was valid from August and September, and probably into October as well. If Chin Well had withdrawn its proposal last month, it would still have been seen as an abrupt about-turn.

    But it may have taken Chin Well these two months to review its operating and financial position since October, and its board may not have met until just before the AGM. Boards generally meet just four or five times a year, not monthly.

    The rejection of the dividend proposal at the AGM may have been timely and the appropriate manner in which to do it. The board’s dividend proposal is not cast in stone, until shareholders approve it at the AGM. It is cast in stone after that. Once it is approved, the company must pay the dividend.

    Hence, it was not wrong in the timeliness of the vote of the major shareholders to reject the dividend proposal.

    Some of them are also directors who proposed the dividend in the first place, but they know the current business conditions more than the minority shareholders.

    As the company put it, global conditions changed for the worse, commodity prices have dropped and there is also a “substantial drop” in the demand for its products. Commodity prices would refer to steel prices which affect the company’s product prices and thus its profit margins.

    The company also has quite a lot of bank debt – about RM230mil – and its priority is rightly to ensure it survives this severe cycle. Furthermore, cash retained in the company still belongs to shareholders.

    The majority view is that business conditions will be even worse early next year. Investors should expect more “surprises” of cancellations or cuts in dividends in the months ahead.

    Companies that have yet to propose dividends would avoid the embarrassment of withdrawing it.

I certainly do not agree with what CS Tan is saying here.

Yes, the reason to withdraw the dividends is probably valid for both companies. Both these stocks are rather not in the best of financial health and given the current business economics worldwide, it's of course prudent that they withdraw their dividends.

However, what has happened is simply appalling.

As a listed entity, it's simply appalling to see the lack of professionalism in both companies. Why can't they THINK before announcing the proposed dividends?

Yes, can't they THINK before shooting their mouths off that they are going to reward their shareholders with dividends?

Is it so difficult to THINK?

Was it hard to see back in August that the world is in an economic crisis? Was it hard to see that the dividends SHOULD NEVER HAVE BEEN PROPOSED in the first place?

To flip-flop in such a manner shows how lacking the management mentality in both listed companies! EXTREMELY UNPROFESSIONAL!

And now that both companies have done such flip-flops on the proposed dividends, which sane investor would dare to invest in their companies?

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