Blackrock, the world’s largest asset manager, has urged Hong Kong Exchanges and Clearing Ltd. (00388.HK) to change its listing rules to force companies to return excessive cash holdings to their shareholders.
Most would reject the advice, except Russian Prime Minister Dmitry Medvedev.
He recently ordered state companies to assign at least 50 percent of their profits to dividend payouts.
The news boosted the share prices of several state-owned companies, including Gazprom, Alrosa and Zarubezhneft.
In fact, the move is aimed at easing the fiscal deficit amid record low oil prices.
The deficit spiked to 1.5 trillion rubles (US$23 billion) last year, representing 2.6 percent of the country’s gross domestic product.
Russia’s finance minister warned early this year that the fiscal reserves would be used up if crude oil prices continue to stay below US$50 per barrel.
As a result, Medvedev has unveiled various measures to cut budget spending.
He ordered a 10 percent salary cut for all public servants last year and also cut military spending 5 percent this year.
Forcing state companies to pay higher dividends would add an extra 100 billion rubles to the 2016 state budget.
Like China, Russia has a massive fleet of state-owned enterprises.
And it has also introduced reforms to the SOEs, such as listing the natural gas giant Gazprom; Alrosa, the world’s largest diamond producer; oil company Zarubezhneft and the world’s largest oil pipeline company, Transneft.
Share prices of these companies all soared over 10 percent in response to the news, and the RTS stock market benchmark jumped nearly 7 percent.
Many investors have taken yield as a key metric for their investment decisions.
For example, the average yield of Gazprom has been about 4.4 percent in the last five years, and the dividend payout ratio was 15 percent.
If the dividend payout ratio surged to 50 percent this year, the yield would jump to 18 percent, and investors would collect a HK$180,000 dividend for every HK$1 million investment in the stock.
Companies like Gazprom with a strong cashflow but strict dividend policy would become sought after for financial investors if they are ordered to increase their dividend payouts.
However, the policy may hurt fast-growing internet stocks, banking plays that face tougher capital requirements and firms that have taken advantage of an industry downturn to expand their presence.
So, the “one-size-fit-all” approach could hurt the competitiveness of some companies in the long run.
Blackrock suggested that the Hong Kong stock exchange require firms that hold more than 50 percent of their net assets in cash to return any funds above that threshold to shareholders.
The rule may provide some benefits to small shareholders of some companies but may harm the long-term value of other companies for their shareholders.
The US asset manager put forward the proposal for good reason.
It failed in its campaign to stop G-Resources Group Ltd. (01051.HK) from selling its crown jewel gold mine in Indonesia at near book value, and the proceeds have not been distributed to shareholders.
The quality of Hong Kong-listed companies varies a lot.
Major shareholders in some of them have not taken care of all the shareholders.
And some companies are very mean in their dividend payouts or even do not pay any dividend at all.
Before buying any stock, investors have to do their homework and carefully check the past dividend payment record.
This article appeared in the Hong Kong Economic Journal on April 27.
Translation by Julie Zhu
[Chinese version 中文版]
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