(MENAFN - The Peninsula) High dividend paying stocks on Qatar Exchange have performed significantly worse compared to low dividend paying stocks in the market. A comparative analysis of the performance over the past five years proves this market reality, a top analyst told The Peninsula.
"This may be probably a surprise to many readers since stocks usually see more investor demand in advance of dividend announcements, but quite often they decline afterwards more than the dividend per share payout", Afa Boran (pictured), Head of Asset Management, Amwal said.
As we come to the end of dividends season, it is worth asking the question that 'how important are dividends?' Local investors in the Gulf region widely prefer high dividend paying stocks, and when a company announces an increase in dividends, the market generally responds positively. But investors must really analyse whether this is a sustainable performance or a short-term jump, and high dividends are really an indication of future positive performance of stocks, he said.
Generally stocks with limited growth prospects pay high dividends. Those that are growing rapidly need to retain earnings to be able to invest in their businesses. If a business that has strong growth prospects pays dividends, it would be limiting its ability to grow.
The Amwal analysis also shows that dividends on their own have not proven to be a good predictor of future stock performance."But that doesn't mean dividends have no relevance. Yes, it has. But only if they reflect strong profitability and earnings quality of the underlying company", Afa said.
If a company generates more earnings than it needs to retain for future expansion, distributing this excess reflects prudent financial management and good corporate governance. In rapidly growing economies however, growth prospects are generally greater than the internal cash flows generated by companies. For instance, non-oil GDP growth in Qatar in the last five years has been around 18 percent per year which compares to an average return on capital of around 16 percent for listed companies.
"Dividends are good, but only if growth and investment opportunities are lacking. The only way shareholders receive value directly from the company is through dividends. So from this point of view dividends are key, but not just current dividends but future dividends too," he said.
Fundamentally, he said, a company's worth lies in its ability to generate healthy cash flows, however, for minority investors in the stock market who don't have control over the use of these cash flows, dividend policy as well as a clear understanding of how the cash flows will be deployed are important considerations.
"If a company needs to retain profits to grow future profits and pay out higher dividends in the future, it should do so, rather than pay out high dividends today and be capital deprived. This is particularly true for a country like Qatar," he said.