EPF Prefers Dividends or Business Expansion?

Recently the Employee Provident Fund (EPF) voted against the proposed share buyback schemes in seven companies, all of which declared lower dividends in 2022. These were Mr DIY Group (M) Bhd, Malakoff Corp Bhd, CTOS Digital Bhd, Genting Plantations Bhd, Pentamaster Corp Bhd, IHH Healthcare Bhd and Tan Chong Motor Holdings Bhd. The pension fund will vote against Sunway Construction Group Bhd’s share buyback resolution as well.

The rationale for opposing these companies' proposed share buyback schemes is that spare cash should be utilised for higher dividends to reward shareholders or for business expansion.

It is worth noting that EPF does not have a blanket policy against share buyback activities. It has voted for the proposed share buyback schemes in companies such as VS Industry Bhd, Fraser & Neave Holdings Bhd (F&N), Kuala Lumpur Kepong Bhd (KLK), CIMB Group Holdings Bhd, MISC Bhd, United Plantations Bhd, UOA Development Bhd, MBM Resources Bhd, Kerjaya Prospek Group Bhd and Oriental Holdings Bhd.

According to data compiled by The Edge, F&N, MISC, KLK, UOA and Oriental maintained their dividend payout in FY2022, while CIMB, MBM, United Plantations and Kerjaya Prospek paid higher dividends during the year. VS Industry, on the other hand, has consistently declared above RM1 in dividends, though the payout was lower in FY2022.

The EPF has substantial stakes of over 5% in about 80 companies on Bursa Malaysia. Genting Plantations, Tan Chong Motor and Mr DIY are the companies that EPF opined should utilise their substantial cash balances to pay higher dividends to shareholders rather than buy back shares. The pension fund also opines that Sunway Construction could utilise its cash balance for business expansion and higher dividends. Also, the EPF believes there could be better utilisation of cash for IHH Healthcare.

In rejecting Pentamaster’s share buyback, the EPF said the semiconductor equipment vendor has weak free cash flow generation with no dividend policy.

Similarly, the EPF said CTOS’ share buyback scheme does not add much value to the pension fund and its shareholders. Instead, it prefers more cash dividends from the credit-reporting agency.

The share buyback scheme has stirred a debate in the US, where President Joe Biden has attacked some companies for spending money on buybacks rather than investing in their operations and called on the Congress to quadruple the tax on such stock repurchases.

Some view cash buy-back as of more value for shareholders versus dividend, as dividend is after tax. Reducing outstanding shares means price should move up. From an economics point of view, dividends and business expansion add value to the economy. A share buy-back scheme is when management has no or little idea of taking the company to the next level. Is it better to get rid of the management with the share buy-back proposal?

Reference:

EPF prefers dividends or business expansion to share buy-back, Anis Hazim, TheEdge CEO Morning Brief, 15 June 2023