Dividend yield basis: KSE Index decline made share prices attractive: analysts

Fall of 34 percent in the benchmark KSE Index in last 11 sessions, after lifting of price floor, has made share prices attractive on dividend yield basis, analysts said. With slowdown in key economic indicators and resultant decline in earnings growth, investors are now focusing on defensive stocks with decent dividend payout as probability of abnormal increase in profitability is declining.
Though the market estimated dividend yield for FY09 is still lower than 1-year T-bill rate, there are many stocks whose dividend return is more than the 1-year T-bill yield and returns offered by banks on term deposits, Muhammad Sohail, Senior analyst at JS Global Capital said. However, for foreign investors the dividend my not be compelling amid risk of currency weakening, he added.
"Based on our analysis of last 16-years, Pakistan market posted highest average annual dividend yield of close to 13 percent in FY02", he said. In FY02 the record high dividend yield was 18 percent. According to another analysis made by JS Research, the average highest dividend yield of top stocks was 20 percent. The ongoing bearish spell may enhance the yield close to those record high levels.
However, in FY02 average yield on 1-year T-Bill was approximately 7 percent compared to current yield of 14.3 percent on 1-year government paper. As evident from the accompanied table, Pakistan offers the highest estimated dividend yield amongst the key emerging markets of Asia at current prices. Out of 9 MSCI EM Asia countries, 4 countries (Taiwan, Thailand, Malaysia, and China) offer dividend return more than the yield on government paper.
In case the local market further trims by 7 percent, Pakistan would also start offering dividend over and above the T-bill yield. Just to remind our readers that T-bill carries re-investment risk, which may not be there in case of stocks. The forward rate of T-Bill also shows that T-Bill yield after few years will not be what it is right now, he added.