My stock broker, MND (God bless him for he has saved me from getting into a ruinous deal often enough – though not as often as I’d like) does not brook even the slightest deviation from his set principles. The moment you mention a speculative move, he comes down hard on you, his tone withering in the extreme – much like a stern school master’s, the one from the olden days when educators were imbued with the spirit to educate and not the sort of rip-off we have to mostly put up with these days.
There is a pretty decent template, for MND a sort of touchstone on which he bases his advice to buy and sell. If he has his way, two simple points would have to be ticked right before committing a single rupee.
Over the years I have found out that this small ‘check list’ is a pretty decent guiding light that minimises the risk to one’s capital in an area that is rightly considered volatile.
First, the scrip that one intends to buy must be of a company with a good history of creating profit and sharing it with its public stakeholders. For the uninitiated, most well-run companies that earn profit pay dividend twice a year – first, interim after six months and then the annual, final one.
Second, the company’s half-yearly and nine monthly reports show a better earning per share, EPS for short, than the previous year. This would mean that not only the likely yield through dividend would be higher than last year. Also since this would attract greater number of buyers than sellers, the prospects of capital gain are higher.
Third, the combination of the first two is good enough for the Average Joe to buy well, and this should result in a minimum 20-25 per cent gain on one’s capital investment through cash dividend and bonus shares. Some companies do pay bonus shares, while others don’t. Based on the history (remember, taking at look at the three-year record of the company before taking the plunge is mandatory), this needs to be factored in at the time of buying.
Bonus shares are a sort of sweetener, especially for the one who wants to keep faith with a company for the long haul. There is one little thing on the flip side, though: the bonus shares broaden the number of a company’s base shares, and as a consequence of this dilution, downward adjustment in the price usually occurs.
That said since such companies have a history of doing well, the price more or less gets back to where it was, thus giving the investor the benefit of dividend immediately, and higher value and more profits down the line owing to larger number of shares.
On the other end of the scale, there are companies that are profitable but do not find it appropriate to share the wealth generated with their shareholders. (Here I’m presuming profitability, but there is a reason for this: a company cannot remain in the red indefinitely and not declare bankruptcy. That means the companies that have not paid dividend for long years and still are afloat are indeed profitable, though they are shy of reporting that). By law they are bound to, but if a company cooks its books to hoodwink the tax man as well as its shareholders, a small investor can do nary a thing about it – other than not touching its scrip by a bargepole.
For instance, around 25 companies in the cement sector are quoted on the Karachi Stock Exchange. Only two had paid dividend last year (Attock Cement 50 per cent, and Lucky Cement 40 per cent), and the rest not a single paisa. Howsoever bullish the market on the cement sector, whatever the speculation, the advice based on this account would be: if you value your money, don’t touch them.
There is another view too: as and when you can lay your hands on around 20 per cent through capital gain, sell and book profit. But that is if you are impatient to get your own investment and the profit back in your bank account or you are eyeing another good buy. Otherwise, in most blue chip cases one could hold, encashing the dividend, and letting the bonus shares sit in the portfolio.
The third week of June having commenced, this is like a good time to invest – for in less than three months the accounts closures are due. What to buy? Regardless of how much you invest, do remember the basic tenets. We have covered some important specifics this week, and next Thursday I would share with you the little tinkering that I am doing to my portfolio – and where and why I see higher profitability. So, until then.
The writer is Sports and Magazines
Editor, Pakistan Today