Posted by: donmihaihai | April 25, 2010

Dividend defiant gravity.

I don’t have the number on my hand, but researches done and number pushed out, dividend provide a big part of stock investment return is an open secret. This is not a best keep secret.

Neither is it that higher dividend yields provide higher return. This is plain math. Of course, after finding stock with high dividend yield, the next time is whether the company can sustain the payout amount or even increase it. No secret here, except that the way to look for it is — checking the sources rather than the dividend itself.

Then there is another concept popping out of nowhere call dividend growth investor/concept. This concept is like a natural evolution. 1st we know dividend make up a big portion of total return over a long period. Then search for stock has high dividend yield. And with the missing part growth added in, it is like the best thing out there. This is not the best keep secret about dividend.

The best keep secret about dividend in my opinion is dividend defiant gravity. Water flow downward but dividend flow upward. As simple as that. haha

Let use UIC and Singapore Land as an example.

Singapore Land is a 74% subsidiary of UIC. So in UIC B/S we can see cash and cash equivalents of $163million as at 31/12/09 which will be use to pay total dividend of $41million. At the same time in Singapore Land B/S, we can see cash and cash equivalents of $89million which will be use to pay total dividend of $82million. As we can see, both companies are paying good dividend that add up to $123million for FY2009. But the fact is only $63million of cash “flow out” of the company. This $63million make up of $41million from UIC and $21million from Singapore Land. The other $60million basically “flows up” of the entities ladder in the UIC group. That say despite owning 74% of Singapore Land, consolidating the assets and liabilities of Singapore Land into UIC books, UIC do not has the “control” of $89million cash out of total $163million cash. It is only after receiving Dividend from Singapore Land that UIC can use the other $60million cash freely.

This is not the only way where an entity like UIC(take it as a single entity) extracted benefits from Singapore Land(take it as a single entity). Money can be flow around by loans, capital, etc. But this is the only way that is stable in long term if talking about a going- concern business. So in this way, dividend defiant gravity as dividend will always be flowing upward in the group and the last entity in the group to hold the money is the holding company before giving out to shareholders.

So on corporate structure reason, as long as they are profitable, companies like Singapore Land, Wheelock properties, Cerebos, Vicom, SIA Engineering, etc will be continue to pay dividend upward.

At the same time, looking at holding company must be aware that if there are many moving parts(subsidiaries) in the group and not wholly owned then it is possible that some moving parts are weak that money just don’t flow into these weak parts as easy as the management might like.

Lastly, take Singapore Land as an example again on how cash “flow”

Singapore Land makes up of a number of subsidiaries and again, not all are wholly-owned. It is very difficult to know how well each subsidiary is doing individually but by checking out on dividend payment to minority shareholders which Singapore Land paid $8million each for FY2008 and FY2009, we can see signs that these subsidiaries are going pretty well. So be extra careful when looking at company with moving parts that are not wholly-owned, and not paying dividend to minority shareholders. This is the sign of weakness and potential cashflow problem going forward.

Well, I am good at telling secrets that are not secrets. These should not be secrets to people who deal in this area of corporate finances, accounting, auditing or just business management or owner. But how strange that I have never heard about it in stock investing….. It is just like stock investing is a total different world where dividend growth or annualised growth become the truth and the truth become untrue.

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Responses

  1. Hi donmihaihai,
    Thanks for the insight! I’m not from the accounting background and it’s nice to read on your thoughts of how business recognise the subsidaries, etc and account into the parent’s numbers but the parents may not necessary “control” the subs….one thought..can the parent seek an increase in the payout?

  2. Dividend is proposed and approved by board of directors for interim. Proposed by BOD and approved by shareholders during AGM thru a resolution for final dividend.

    Who ever control the board, control the resources of the company. That mean substantial shareholder want to control the board. UIC and Singapore Land is a good example. Look at their BODs and the answer is pretty clear whos want the control of both companies.


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