KARACHI: The corporate sector seems reluctant to dish out dividends even though its earnings are growing regardless of the tough economic conditions.

The thinning of payouts has led to “decreased investment” in the stock market and undermined “investor confidence,” forcing the stockbrokers to seek immediate intervention from the apex regulatory authority.

In a May 5 letter to the Securities and Exchange Commission of Pakistan (SECP) Chairman Akif Saeed, Pakistan Stockbrokers Association Secretary General Bilal Farooq Zardi said the drying up of dividends has been detrimental to the interest of minority shareholders.

“We request you to intervene and introduce policies/codes mandating companies to pay dividends to their shareholders,” he said, demanding that special guidelines be issued to ensure fair and consistent dividend payments.

Stockbrokers ask SECP to ensure dividend distribution

Speaking to Dawn on Saturday, Mr Zardi said about half of the major listed companies have been refraining from paying out dividends without stating any reason.

“It’s essential for companies to pay dividends to their shareholders regularly in order to ensure a fair distribution of profits,” he said.

The proposal is in line with the international best practices as many countries require companies listed on their stock exchanges to maintain a certain dividend pay-out ratio, he said. “In some jurisdictions, companies are required to pay a minimum dividend or face penalties. This encourages them to maintain a regular dividend payment schedule to avoid any legal complications,” he said.

In the last calendar year, companies belonging to the KSE-100 index declared cash dividends of Rs404 billion, down 4pc from 2021, according to data compiled by Topline Securities.

This translates into a dividend pay-out ratio of 39pc in 2022 versus 45pc a year ago. In simpler words, blue-chip companies paid Rs39 out of every Rs100 they earned to their stockholders in the shape of dividends in 2022.

In contrast to a year-on-year decrease in the dividend pay out ratio, after-tax earnings of the same firms increased 10pc over the same 12-month period to Rs1.03 trillion.

The lack of enthusiasm for doling out dividends has led to the piling up of cash reserves on the balance sheets of blue-chip companies. One of the favoured uses of this excess liquidity in the eyes of company sponsors is share buybacks, transactions in which the majority owners use distributable profits to purchase shares of their own companies from the open market.

The total number of shares goes down once a company conducts a share buyback for cancellation. As a result, its break-up value and profit per outstanding share go up. However, many analysts oppose the practice on the pretext that the exercise deprives the stock exchange of valuable shares.

Firms that recently announced or completed share buybacks include Maple Leaf Cement Factory Ltd, NetSol Technologies Ltd, JDW Sugar Mills Ltd, Bank Alfalah Ltd, Lucky Cement Ltd, Engro Corporation Ltd, Synthetic Products Enterprises Ltd, Kohat Cement Ltd and Kohinoor Textile Mills Ltd.

Mr Zardi said share buybacks should be discouraged because the accumulated profits being used for the exercise belong to the minority shareholders as well.“The SECP should make it mandatory for listed companies to either announce dividends or explain why they’re not declaring the same despite posting earnings. This will ensure transparency and fairness,” he said.

Published in Dawn, May 7th, 2023