LSX shares and dividends versus interest rates

LSX shares and dividends versus interest rates

Yesterday, Vientiane Times had a welcome enquiry about dividends. An investor was concerned that future dividend payments may be less than bank cash deposits' interest rates. That may have been a genuine concern pre 2000, but today in 2011 it is both out of sync and the old school of thought. As times change and business modernises, the world is getting smaller as technology advances.

For example in the past 2 and half years the Global Finance Crisis (GFC) has plummeted interest rates to 60 year lows and most share prices nosedived 40 percent.

The GFC destroyed many economic grass-roots theories that previously applied. As a learned student I found the theories of both my tutors and peers were wrong, and new considerations were needed.

Considerations:

Dividends to today's investor and fund manager are a secondary consideration.

The primary consideration today vests with an appreciation in share price, then consider dividends.

A mix between cash property and shares is always a good strategy, but all have their risks.

Fixed interest rates are good in that they are guaranteed, but inflexible as they must go the full term to secure the rate.

The disadvantage of fixed interest is its inflexibility as should you withdraw your investment prior to the cash deposit fixed interest expiry date, the interest rate is penalised and reduced.

Shares on the other hand have a bigger advantage as they can be disposed of at any time and if you do receive a dividend it is a bonus.

Shares are also cyclic as they can rise or fall at any point in time. What catches the old school of investors seeking dividends is if the share price falls, the “dividend yield” actually rises.

Investors should map out all the major considerations for diversification between Cash – Bonds - Property - Shares.

It is advisable to “paper trade” (document and practice) your trading strategy before investing in your preferred stock. Seek out all the options but also seek alternative opinions.

Local Investment Conditions: In Asian markets many listed State Owned Enterprises (SOE) generally pay dividends on a stock's share price at around 10 percent annually. Why does this rate as an investor consideration?

The government is usually a major shareholder in any SOE and therefore one of the major beneficiaries of any declared dividend, which is one of the reasons they are privatised, apart from IPO capital raising.

So locally what can be expected from the LSX, BCEL and EDL Gen, in 2010-2011? Whilst under no obligation, from many years of experience the reasonable probability is the LSX listed companies are very likely to have their Board of Directors declare an annual 10 percent dividend.

The enquiry we received was from a resident investor.

We base our primary conclusions on comparing an investment of US$10,000 in either a bank's Fixed Interest Rates or an LSX Share.

On 11/1/2011 BCEL opened trading at 5,000 kip, and by January 19 the share price was 10,500 kip - that's 110 percent in just 10 days. Our equity ownership means we now have (if we sold) US$21,000 to bank.

This is a highly irregular annual trend. Eventually BCEL has to meet what is termed ‘a resistance level' but we have confidence the share will trend to 15,000 to 17,000 kip (US$2) before reaching some resistance. However there are always risks associated with such forecasts.

This is my reasoning of a very compelling case for an investor strategy to consider investing in the bank's stock as opposed to an investor placing money in the same bank's cash deposit account.

If the share price never altered for the rest of the year our total cash equity position in shares, and if a 10 percent dividend as per our prediction occurred, we have US$23,100, or a percentage gain of 131 percent

On 1 1/1/2011 EDL Gen opened trading at 4,300 kip; if the share closed today at 5,800 kip that's a positive gain of 35 percent, again in just 10 days. Our EDL Gen equity ownership m eans we now have (if we sold) US$13,400 to bank. This is also a highly irregular annual trend.

Eventually EDL Gen will also meet a resistance level but we have confidence the share will trend to 8,000-10,000 kip (about US$1) before reaching some resistance.

With the same assumption the price never alters for the rest of the year, and with a dividend paid we would have US$14,837 for an impressive 48 percent gain for the year

Our fixed interest, whilst guaranteed has an entirely different outcome to shares/ dividends. Our fixed interest holdings position when valued over the annual fixed interest period is a very conservative return of less than 1/3 of 1 percent or an improvement of just US$32.88 cents or total equity of US$10,038 cash in the bank.

With 265 days to go “we are still locked into a total fixed interest equity holding” and after 12 months our best result is already known to be at US$11,200 compared to today's BCEL value of US$21,000.

Regardless of the investment chosen and for whatever coherent decision you decide to use, there are risks in every investment. We maintain the view that shares in a bank or a stock present volatility, but longer term gains than cash deposits in the same bank. In Laos, the LSX stocks BCEL and EDL Gen look persuasive investments.

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