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03 December 2023

Dividends come under pressure

By Matt Smith

UAE listed companies are poised to predominantly issue stock rather than cash dividends for the 2008 financial year in a move unlikely to be popular with shareholders.

Under-pressure firms may opt to preserve cash flow in light of the current economic squeeze, with credit lines continuing to be tight and most sectors facing shrinking growth. "It doesn't make much sense for companies to hand out cash when credit markets are so stressed, especially for project-based firms such as those in real and estate and construction, which have large cash requirements to operate," said Sherif Abdul Khalek, Beltone Financial institutional trading manager.

Excluding secondary listings, the 71 UAE-listed companies paid a total of Dh19.7 billion in dividends for the 2007 financial year, according to Zawya.com. The average payout was Dh287m or Dh2.26 per share, although the latter figure is warped by extraordinary dividends from three firms. The dividends for the 2006 financial year were broadly similar, with 66 UAE companies paying a combined Dh18.8bn or an average of Dh285m. The mean dividend per share was Dh1.49.

Meanwhile, the benchmark UAE interbank lending rate suggests domestic credit markets remain troubled, despite a recent fall. It topped 4.7 per cent at the peak of the banking crisis in mid-October and has since retreated to 3.6 per cent, but this is more than triple the official UAE rate of one per cent.

In this environment, cash-rich banks may distribute cash dividends, but otherwise stock dividends will largely be the norm across other sectors, analysts predict. "I don't think companies have any alternative," said Wadah Al Taha, a financial analyst.

"They have to protect their cash flow – 2009 will be a huge challenge… tying up cash in dividends doesn't make any sense."

He believes some firms will opt for a mixed share and cash dividend, although the latter component is likely to be minimal.

Investors are unlikely to be happy with share dividends, especially in light of the collapse in stock prices, with the DFMGI falling 75 per cent since the end of 2007, while share dividends will further dilute the value of their holdings.

"There's little possibility of widespread cash dividends and no dividend will be better than stock," said Taha. "The latter will create artificial and unnecessary pressure on stocks and could lead them lower."