When a company in line with the relevant provisions of of the Companies and Allied Matters Act, 1990, declares dividend from “distributable profits”, the dividend so declared, becomes payable to shareholders (investors), whose names appears, on the register of shareholders as at the record date, to be determined by the directors of the company and the Registrars.
The Companies and Allied Matters Act (CAMA) of 1990 defines a dividend as a portion of a company’s profits that is distributed to shareholders.
The legal right of shareholders to dividend as a reward for investing in a business is contained in S.385 of the Companies and Allied Matters Act, 1990 (CAMA), which reads thus:
“Dividends shall be special debts to shareholders and recoverable within 12 years, and actionable only when declared”.
The implication of the above law is that a shareholder can take necessary steps to claim dividend entitlement once it is still within the limitation period.
The payment of dividend by companies is a strategic decision, taken the board of directors on behalf of the shareholders and is determined by the dividend policy of the company.
Normally, profitable businesses witness dividend growth year-on-year and this is reflected in the appreciation of the prices of such stocks or equities.
The dividend rewards, as a return on investment (ROI) can come in the form of cash, bonus issues, (a free issue of additional shares by capitalizing the retained earnings of a company).
However, there are companies that do not pay cash dividend as a matter of corporate policy.
Berkshire Hathaway a highly profitable and well diversified holding company, with renowned investor, Warren Buffett at the helm of affairs, do not pay cash dividends.
The company reward investors through the process of home grown dividend – selling stocks at capital gains for dividend.
A major consideration why a company may withhold dividend is the availability of future investments with the potentials for positive cash flows, which in turn confers additional benefits to shareholders, in the near term.
This is considered a more efficient means of funding new project initiatives, than borrowing which will increase the weighted average cost of capital (WACC), to the firm, and reduce return on equity (ROE) when interest expense on loans are paid to lenders.
THE NATURE OF DIVIDENDS
Dividends are paid from accumulated profits, or retained earnings.
Dividends can be paid from the liquidation value of a company.
Dividend announcement is a corporate action, which happens at the end of a financial year.
Dividends can be a fixed annual percentage in the case of preference shareholders – a class of investors who are treated like creditors or lenders to the company.
Dividend can be used to measure the performance of a company, depending on its growth trajectory.
NIGERIAN CAPITAL MARKET AND UNCLAIMED DIVIDENDS
As at 1999, unclaimed dividend (UD), according to reports by the Apex Capital Market Regulator – The Securities & Exchange Commission, (SEC) was put at N2bn.
This figure rose to N8bn in 2008, N41bn in 2013 and N80bn in 2014.
As at 2015, the figure hit a new high of N90bn, then, in 2019, it has surged by 76% to N158.44bn before reaching N170bn in 2020.
Reports from regulatory authorities estimated unclaimed dividends at a whopping N190bn, as at August 23, 2023.
With inflation rate at 24.48% and Monetary Policy Rate (MPR) at 27.50%, what justification does an investor have for allowing his funds to be part of the unclaimed dividend?
There is absolutely no reason for investors to ignore their dividends and assets, without taking reasonable steps to realize same.
FACTORS THAT AFFECTS DIVIDEND POLICIES OF A FIRM
Profitability: If a firm is profitable in its business activities, the tendencies for dividend payment after deductions for operating expenditure is high and vice versa.
EARNINGS: A company with positive earnings per share will distribute part of the earnings as reward to shareholders.
STABILITY OF EARNINGS: Consistency of earnings, not one-off earning is a barometer for measuring long-term performance of a firm.
NEW PROJECTS: A firm with prospects of new projects, businesses or acquisitions, which will have positive benefits to shareholders is likely to adopt a lean posture towards distribution of dividends.
TAXATION: The incidence of taxation on shareholders is a strong consideration. Investors in high tax brackets may prefer capital gains, while those in low tax brackets may opt for cash dividends.
CASH FLOWS: It is one thing for a firm to declare profit and another thing to have the cash to pay the dividend as declared. This could be the case, where the volume of credit sales is very high. That means that most of the profit are locked up in the hands of debtors, awaiting payment.
In such a scenario, dividend payment, which involves cash outlay will be hampered.
INDUSTRY NORMS: Some industries are known for consistent dividend payment, once their performance in a financial year is good. In Nigeria, the banking sector can be fingered as lead dividend payer. The telecommunications sector has proven to be good in dividend payment.
FINANCIAL LEVERAGE: This is the policy of using borrowed funds for financing business expansion and new projects. A company with a policy of using financial leverage, will always payout profits as dividends, knowing it will resort to borrowing for the funding of new business initiatives.
CONTRACTUAL OBLIGATIONS: Where a business entity has contingent liabilities capable of stretching its financial position, within a financial year, the firm may be economical with the payment of dividend.
MARKET EXPECTATIONS: Usually the market has expectations from listed firms. It is this expectation that drives the demand and supply for the stocks of companies and their relative share prices. Any shift in these expectations is capable of eroding confidence in the affected firm.
Therefore, being able to meet positive investors expectations is important to firms operating in any capital market and a performance measure for senior management.
CORPORATE FINANCE: This refers to the availability of funding sources and the capital structure of the firm as it affects the shareholders. A firm which is highly geared (high on borrowed funds) will definitely have high interest payment obligations.
The management must strike a balance between continued borrowing, high interest payment, reduction of borrowing and the payment of dividends.
REASONS FOR UNCLAIMED DIVIDEND
RELOCATION: When address locations change, some uninformed investors do not update their records with the Registrars and the Central Securities Clearing Systems Limited (CSCS).
SECRET INVESTMENTS: Some beneficiaries may not be aware of their inheritance in stocks, when the original investors dies without disclosing those investments.
INTESTACY: Where a deceased died “Intestate” (Without a Will), knowing the position of his assets could be difficult.
INVESTOR IGNORANCE: Some investors do not have any serious interest in their investment.
They may simply have joined the bandwagon effect, bought when close friends were buying and thereafter, forgot about the shares and the accrued dividends.
LOW VALUE OF INVESTMENT: Some investors consciously or unconsciously committed an infinitesimal amount of money into the investment.
Possibly as a way of testing the waters. Along the line, they forgo their investment due to the low level of financial commitment.
LOSS OF SHARE CERTIFICATES: Some investors lost their documents to fire, theft, flood or various types of mishaps. It is for this reason that Nigerian Capital Market evolved the idea of De-materialization of share certificates, using the Central Securities Clearing Systems Limited (CSCS) as a depository for capital market instruments.
LACK OF CERTIFIED INVESTMENT ADVISER: Investment in the capital market is an elite business. It is highly regulated and dynamic.
Therefore, investment in this space require the engagement of a licensed professional to provide the necessary guidance to clients on a timely basis.
RECOVERY PROCEDURES FOR UNCLAIMED DIVIDENDS, BONUS AND STOCKS
Engage a Stockbroker. The services of a qualified broker is a necessary starting point for the recovery of your assets.
Create an account with the Central Securities Clearing Systems Limited, (CSCS), through your Stockbroker.
*Your Stockbroker will guide you to obtain Statement of Account from the respective Registrars to determine the value of your dividends and the volume of your shares outstanding, where you have no records or insufficient records.
Process E-Dividend Mandate Forms with the various Registrars
Follow the process with your stockbroker till the task is completed.
*Re-invest your accumulated dividends in stocks with strong financial fundamentals, in order to grow your portfolio.
The power of the compounding interest factor is one of the wonders of the investment world – leverage it.
CONCLUSION
Money making is an art. It requires conscious decisions and actions to drive the goal.
By realizing your assets plus dividends and re-investing same, you build a sizable portfolio of investments over a period ofAnalyst
Investment in capital market instruments such as stocks and bonds can be used, as a strong support-pillar, in addition to your pension contributions, for Retirement Planning (RP).
As you may be aware, returns from pension contributions are not very high to support your lifestyle after retirement, particularly for average-low income earners.
The reason for the low return is simple.
Pension Administrators, avoid investment in risky assets in order to protect the funds entrusted to them.
The government regulates their investment destinations through the Pension Commission (PENCOM).
In order to mitigate, any shortfall in cash flow, upon retirement, we all need to develop our financial Intelligence, as economic agents and explore other viable options, for generating additional income streams, while at the same minimizing our risk exposures to the barest minimum, leveraging information from well-informed investment industry professionals.
These opportunities exists, if only we are ready to navigate the process.
Christian Isaac Anyalisi, a Chartered Stockbroker/Securities Analyst writes from Lagos, Lagos State.
