104 - Beware of bumper dividends

104 - Beware of

bumper dividends

Companies announcing an unexpectedly bumper dividends are always a sweet wonderful music to shareholders. The more dividends, the sweeter the music will be. After all, as shareholders of any company, any bumper dividends are always welcome and will add in more ringgit to the purse to spend or keep.

Normally an unexpectedly announcement of a bumper dividends will have a spike of interests on its share price immediately on the next trading day. Investors who wish to buy the shares to be able to qualify for the dividends are willing to pay a higher price than the previous day's closing price while those already owning the share would not be that stupid to sell at the same closing previous day price.

It is like a bumper dividends has caused more buying than selling interests among investors. One should note that once the dividends has been ex-dated, the share price will automatically re-adjust itself the next day to reflect a new fair opening price again.

What caused a company to pay out an unexpectedly bumper dividends? There are many reasons. The reasons could be a sale of a subsidiary business that resulted in excess cash, a change of policy of dividends payout ratio, say for example, company has been earning an average of 50 sen for many years and has been regularly paying just a miserly dividend of 5 sen, decided to change its policy to pay at least 80% of its earnings, the dividends would be 40 sen and that would spark a rush for its share price.

But while bumper dividends are good for all shareholders, the more under-mining issue is still the consistent earnings every year of the company concerned. As a shareholder, I would not be concerned at all of the share price if my invested company pays bumper dividends and still continue to make reasonable consistent profits.

There are  two cases I would like to share. Take the case of Harrisons Holdings (M) Bhd. Harrisons announced a sudden bumper dividends of 25 sen for financial year 2016 (previously 15 sen for financial year 2012 - 2015).

When it announced the 25 sen dividend on April 12, its share price closed at RM3.44. It closed 23 sen higher at RM3.67 the next day. Then on its ex-date June 23, it closed at RM4.28, yet the next day the share fairly dropped to close at RM4.04 (to reflect an adjustment of 25 sen dividend).

Since then, Harrisons has maintain its share price around RM3.90-RM4, still far ahead of its prior announcement of 25 sen dividends price of RM3.44 on April 12.

Why didn't Harrisons share price drop back to its RM3.44 after its dividends pay out. The reason is simple, Harrisons has announced better results for its first half this year, a total dividends of 18.28 sen. On an annualised basis, the eps would be a whopping 36.56 sen and most probably Harrisons would at least pay another 25 sen dividend for Financial Year 2017 in 2018. Who knows Harrisons might be generous enough to even pay out 30 sen dividends next year?

At the time of posting, Harrisons share price closed at RM3.99 on Oct 5, 2017.

Keep your fingers crossed for the coming two quarterly results of Harrisons. It will give you an early indication of how much dividends will be paid out by Harrisons.

Another high dividends paying stock is Apollo Food Holdings Berhad. Apollo is due to pay a 25 sen dividend too,  on Jan 9, 2018. The ex-date is Dec 8, 2017. After Apollo announced this dividend on June 23, its share price fluctuated between RM5 to as high as RM5.48 during the next several weeks.

Since then, Apollo has retreated back to its RM5 range. If this price of RM5 continues to hover until after the ex date on Dec 8, the newly adjusted price on Dec 9 will be RM4.75 and then it is left to market's supply and demand situation.

Now why has the share price not been able to stay at least 20 sen higher at RM5.20 since the announcement of the 25 sen dividend?

To find out why, let us track back to its last seven quarters of earnings per share of single digit only. Prior to these, its last eighth and ninth earnings per share was double digits.

It showed Apollo was experiencing difficulties in several areas and resulted in subsequence quarters of poorer earnings. Only last year, Apollo share price touched a high of RM6.33 on Oct 17, but that was before the ex date (Dec 8, 2016) of a bumper dividend of 30 sen payable in January this year.

Since then, after the dividend, the share price has been trending down in tandem with its poorer results. Although there is the coming 25 sen dividend with the ex date of Dec 8, one should note with caution to see of it can maintain back to its share price of RM5 or it will trade lower than its after ex date price.

Amanahraya Trustees Berhad of Skim Amanah Saham Bumiputera has been selling almost every days since the release of its last quarter results. Amanahraya Trustees Berhad is the second largest shareholders of Apollo (with 14,950,000 shares / 18.69% stakes) and its daily aggressive selling could suggest it is either seeing the future is not so bright or perhaps for other undisclosed reasons.

Whatever it is, yours truly has already decided to sell my only 1,000 shares on July 18 at RM5.37. As I said earlier when I sold, my concerns were Apollo might report lower and lower profits in the coming quarters and such high dividends might not be sustained in coming years.

Again this is my decision and if you are holding Apollo shares, please make your own judgements. Apollo could just prove me wrong later with improving results. At the time of posting, Apollo share price closed at RM4.96 on Oct 5, 2017, incidentally it is also its 52-week low.