Treasury bills yield, dividend now at par

Pakistans stocks showed resilience during the week ending on March 15, 2009 despite the political turmoil in the country. Though the volumes were thin but equity prices remained intact, ignoring the mounting tension on the local political scene. "Why is this happening?"
"Political uncertainty is bad for the markets", "Unstable government should deter investment", were some of the comments. "But investors are not selling their stocks as the dividend yield now being offered by the local bourses is equal to the return on comparable government paper," said Mohammed Sohail, a leading analyst and stock strategist.
According to him, this has happened in Pakistan after a gap of 5 years that next year dividend yield is now equal to 1-year T-Bill yield. However, in 2003, dividend yield was higher than return on government paper.
Most of the times in Pakistan equity market, the dividend yield has remained below the 1-year T-Bill rate. Sohail said that "due to average earnings growth of 20 percent in last 20 years, investors were willing to earn a lower dividend for the current year as they believe that this will increase at the rate of 20 percent and will become higher than the return from government backed securities".
But right now, in 2009, estimated dividend yield of market is between 11-12 percent, close to the yield on government T-Bills. This is in spite of the fact that earnings will decline in 2009. If financial sector firms are excluded, whose dividend payout are lower, the market dividend yield would be much higher, Sohail said.
With the 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, he said. There are many stocks whose dividend return is more than the 1-year T-bill yield and returns offered by banks on term deposits, according to Sohail. Stocks like OGDC, PPL, POL, Hubco and FFC offer more than 15 percent estimated dividend yield for the year 2009.
However, despite these attractive potentials of earnings dividends, the two things that are missing from the capital market, according to Sohail, are confidence and liquidity. It will take some time before confidence and flow of funds is restored back, he added.