AIM rocked by dividend culture clash

Children's clothing and footwear company Camkids (CAMK) has followed logistics business China Chaintek (CTEK) in cutting its dividend but dressing this up by offering a higher scrip dividend. Cutting the dividend is a symptom of the problem, which is that the cash dividend levels used to attract investors were too high in the first place.

The management of Chinese companies can't be expected to understand UK investors and even British company management teams will not necessarily comprehend that some shareholders are predominantly interested in growth and others want an income. Investors seeking income would generally prefer a predictable, and hopefully rising, dividend and not one which moves up and down each year - and they do not want additional shares.

A major Chinese shareholder tends to be happy to take shares rather than a cash dividend so they have a different mentality. This is why companies have advisers - they are not there just to sell shares. They should be advising their clients that a steady, progressive payout is better than a rollercoaster dividend. Whether the company listens or not is another matter.

More recently Chinese companies, such as Camkids and China Chaintek, have floated on the back of the fact that they can generate cash and pay dividends. Their brokers have sold the shares to investors on the back of apparently attractive yields. So, it was in the interests of the brokers that the yields were high and their analysts initially predicted that the dividends would be edged up.

Both Camkids and China Chaintek were both growing companies when they floated and that growth requires funding. The advisers should have made sure that there was enough cash being kept in the business so that expected and additional growth opportunities are covered. They will surely have advised the companies on the appropriate level of dividend.

Laughable dividend announcements

The initial problem of too high a dividend has then been compounded by the laughable dividend announcements which believe that the scrip dividend is the main dividend and the cash dividend is just a potential alternative kindly offered by the company.

To quote China Chaintek; "the company will pay an interim scrip dividend of 2 pence or a cash alternative of 1 pence". I may be old fashioned, but to me the cash dividend is the dividend and then shareholders can be offered an alternative of taking the dividend in shares.

Yet again, this is the advisers' fault not the company's. Even if the company thought that this was an acceptable wording then they should have been advised against it. More likely, though, the advisers thought that this was a good way of announcing a cut in the dividend as an unchanged dividend and save face.

On top of this, the amount of cash involved is pretty small with the main Chinese shareholders tending to take their dividend in shares anyway.

China Chaintek, which is advised by Daniel Stewart and previously had ZAI Corporate Finance as nominated adviser, halved its cash dividend to 1p a share, while maintaining the scrip dividend. Based on the take-up of the scrip dividend when the final dividend was paid, and assuming no additional scrip dividend take-up, this will save around £110,000. Halving the final dividend will save a further £220,000.

Cash generation

China Chaintek had more than £40 million in the bank at the end of June 2014 and it has been generating cash, although it does require around £60 million to complete the construction of a new facility by 2016. Additional cash will also be required to open regional centres to satisfy e-commerce demand. Previously, Daniel Stewart forecasts suggested that continued cash generation meant that there would be cash left after investing in the new facility.

Similarly, Camkids, which is advised by Allenby, says that it is paying an increased scrip dividend of 2.4p a share or 2p a share cash dividend. The cash saving for Camkids on cutting its interim dividend by 0.3p a share is £231,000 - if everybody took cash. The main 66.9% shareholder took shares last time and, although he says he will not increase his percentage shareholding he is likely to take most of the dividend in shares again, this suggests that in reality less than £80,000 would be saved by Camkids.

Camkids had net cash of £48.6 million at the end June 2014, which, at the equivalent to 64p a share, is higher than the share price. Admittedly this is a high point for cash and it is likely to be much lower at the year-end. At the end of 2013, net cash was just over £30 million and Allenby reckons that it should be more than £40 million at the end of this year. Allenby also forecasts cash that is the equivalent of more than £50 million by the end of 2015. It should be noted that RMB/£ exchange rate movements will affect these figures to some degree but the underlying cash figure is expected to increase.

Forward planning needed

It is always right for a company to cut its dividend if it needs to conserve its cash. Both Camkids and China Chaintek do have investment programmes and new opportunities have come along, but the dividend reductions should not have been needed. There should have been enough forward planning to cover these additional opportunities and the dividend should have been set accordingly. A special dividend could be paid if the company had more cash than it required.

Admittedly, these dividends may have helped to sell the shares but they have not helped to hold up the share price. This will have disappointed the management teams and there is a suspicion that this could be why they may not be keen to continue to pay the previous level of cash dividend. However, much of the share price weakness has been due to stock overhangs - something that the adviser needs to manage.

If these companies increase the cash dividend next year there will be no confidence that it will not be cut again the following year, thereby negating the attraction to investors seeking a steady income stream.

It is very easy to attack Chinese companies when things go wrong, and there are additional pitfalls to investing in any non-UK company, but in reality it is the advisers' promises that attract the companies to AIM. If their advice is poor then it is the company and the investor that lose out.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.