Unlike big automakers like Indus Motors that have historically distributed over 70 percent of their earnings to shareholders, cement companies more or less have demonstrated restraint. Apart from Fauji Cement, many cement companies have maintained dividend payout ratio to less than 60 percent, while most have less than 40 percent of earnings. In FY19 so far, dividend per share has decreased while the payout ratio have also reduced signaling that cement companies are retaining their cash flow for rainy days ahead.

Dividends are often considered a mechanism by which a company offers information about the company's future performance to shareholders while offering a measure of company's financial interest to investors. A 2015 study published in the Lahore Journal of Economics had some interesting findings on the dividend policy of the corporate sector: it found that while profitable firms tend to give higher dividends, firm size had a negative relationship with dividend payout ratio i.e. larger firms retain cash to pay off their liabilities. Growth in sales also leads to higher dividends while concentrated ownership within family has a negative impact on payout due to agency problems (in 2006, a study found that a management chose a dividend policy which served its own interest rather than outside shareholders that are mostly in minority).

Another study conducted in 2018 focusing on cement companies in Pakistan using data up to 2016 found that while sales growth, profitability, corporate tax and previous dividends were found positively significant to dividend payout; the liquidity of the company, leverage and firm size were not significant to explain dividend payouts.

Evidently, reduced sales as well as profitability have persuaded cement firms to subsequently reduce payouts. Average profit margins for the four firms that have announced their FY19 financial results so far has reduced to 14 percent from 21 percent during FY18, further down from 24 percent during FY16. Average gross margins have reclined from a phenomenal 43 percent in FY16 to 24 percent. Average dividend payout ratio has reduced 46 percent to 32 percent for the four players.

Overall economic slowdown coupled with reduced current and foreseeable government development spending, and a visible lethargy in real estate development with a crackdown on informality in the sector do not bode well for cement demand in the coming quarters. Cement companies in the south can sell off their clinker to overseas markets—granted at much discounted rates—but others in the north don't have much of that choice. Both their primary export markets—Afghanistan and India—have become less open to Pakistani cement exports, the latter having closed down altogether due to political tensions.

The dividend payout for the four companies is a clear signal—it may not be the worst of times, but it is definitely not the best either. Expect the same trend for other cement players over the next few days as they announce their financial results. Since many cement players have expanded in the past year or so incurring higher debt, while reduced demand and cost pushing inflation has pushed earnings down, most companies would want to keep more cash in hand to reduce their debt burden. Attock may stand out as its payout rose—it has been contributing a lot to clinker exports—but even then, its dividend per share fell in FY19.

One thing is for sure, investors cannot complain about uncertainty any longer. To their part, cement firms are providing that amply.

Copyright Business Recorder, 2019