Dividend Dive May Be Good News

By Mary Holm

Monday 2nd April 2001

A Lower Hutt reader is not as naïve as he seems to think. "I do not have a comprehensive knowledge of stocks and shares," he writes. "However, at 68 I am trying to learn, albeit rather late in life.

"I read that investors in Telecom are annoyed that their dividends are reduced, due to Telecom seeking to enter the Australian market.

"But if I were purchasing for the long haul, i.e. for offspring later in their lives, I would look at the end result. Or are these investors, whom I do not know, only concerned at their immediate returns?"

I'm sure some of them are. Telecom, for years, paid high dividends, even by New Zealand's high standards. Many individual shareholders probably came to rely on that money as regular income. When the payouts were cut, naturally they were unhappy.

Was that rational? Only to some extent.

Telecom has apparently been doing what every good company should do - consider what is the best use for its profits.

If the money is going to sit around in the bank, the company might as well give it out in dividends, and let each shareholder decide how they would like to spend or invest the money.

But if the company has growth plans, which it expects will lead to bigger profits, it should pay less in dividends and invest more into its expansion.

In theory, shareholders shouldn't care too much which the company does. If the expansion is successful, the share price will rise. What they lose in dividends they pick up in capital gains when they sell their shares.

In practice, of course, if you're used to receiving big dividend cheques and now you have to sell some of your shares to maintain the income flow, that's more hassle and expense.

What's more, many Telecom shareholders wouldn't be too impressed by how much they get when they sell.

While the share price has risen impressively since hitting a low of $4.50 early this year - as I write, it's $5.86 - it's still well below the $9.81 of a year ago.

The fall is in line with that of many telecommunications companies around the world. No doubt there are also local reasons, including increased competition. Nobody ever knows for sure why a share price changes.

For all that, though, Telecom's price would have been even lower if it had continued to pay dividends at its old rate. There would have been less money left in the company.

All the Moaning Minnies who didn't like the dividend cut would have been holding shares worth somewhat less than they are today.

And in the long term, if Telecom's recent moves prove to be wise, the share price should rise more than it otherwise would have.

There are a few lessons in all of this:

- Shares are not like fixed interest investments. You should never count on dividends continuing at the same rate.

- The company you invested in five years ago might be quite different now. Telecom, for instance, is now considered a riskier proposition.

- It's not wise to hold shares in just one or a few companies. If their fortunes change, or they change the way they do business, it could affect you markedly.

- A lower dividend is not, necessarily, a bad thing.

Where does this leave our Lower Hutt reader? I like your long-term perspective. Every shareholder should look at what you call "the end result", rather than what's happening today.

I suggest, though, that if you're buying for your children, you spread your risk by going into a share fund rather than just Telecom shares.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com or by mail care of this newspaper. Sorry, but she cannot respond directly to readers.

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