Ideas & Debate

Could the dividend boost be catalyst that market needed?

Co-operative Bank shareholders peruse the lender’s financial report last week. Dividend payout has boosted performance at the bourse. PHOTO | SALATON NJAU | NMG
Co-operative Bank shareholders peruse the lender’s financial report last week. Dividend payout has boosted performance at the bourse. PHOTO | SALATON NJAU | NMG 

The market has been looking a bit more exciting of late. Up some 18 per cent since the start of February, equities appear to have finally awakened from the two-and-a-half year slumber.

But not too fast, looking closely, the mini-rally can be attributed to one strategy alone: dividend-chasing.

This month alone, there has been no less than 10 companies closing their books for dividend pay-outs. In April, they numbered four. Out of these, nine have already paid out with BAT Kenya dishing out the heftiest of them all – Sh39 a share. Simply put, dividends lifted the boat.

Question is; with the dividend season effectively over, what will keep the boat floating higher? My quick answer is I don’t know.

Though certain that change is nigh, I must admit I am unsure about which drivers will do the job. For that reason, allow me to be a watermelon on this one.

On the positive side, it’s important to remember that markets move in cycles. So, with the recent up-swing, it’s possible that a new cycle up is here with us.

History shows us that higher highs and higher lows usually point toward a trend reversal. Perhaps the “dividend-boost” was the catalyst we’ve all been waiting for. Put all that together and you can imagine an argument for stock prices going higher yet.

But hang on, though – these are equities. It’s probably worth double-checking before getting too excited. Though history provides a blueprint for the way things usually play out, it’s worth remembering that every cycle is different.

The pendulum swing from euphoria to panic can play out over many years – as it did from 1997 to 2002 – or it can happen in an instant – as it did in 2008.

On the negative side, Q1 numbers are turning out unimpressive. For example, out of the seven listed banks that have released their first quarter results, only Diamond Trust has posted an increase in core earnings per share.

Standard Chartered Bank, Equity Bank and Barclays Bank posted a 20 per cent, 6 per cent and 19.8 per cent decline in core earnings per share respectively, to Sh6, Sh1.3 and Sh0.3, in the same order. Furthermore, upcoming elections continue to cast a dark shadow on the markets.

What’s more, maintenance of the key rate at 10 per cent could continue to pose credit availability challenges effectively putting a hold on projects. It should be noted that most company economic calendars are still light on investment.

All in all, the future is unknown. All investors need to have is a backup plan, because the markets rarely cooperate and unfold exactly as you wish. One of the few guarantees you’ll have as an investor is that things are bound to go wrong in the future.

Human nature ensures that this will be case. All of the data in the world on valuations, fundamentals, technical, political events and sentiment can’t help you predict the precise moment other investors will collectively decide it’s time for a bull run.