Markaz Research Examines the Potential of Yield Stocks


Kuwait Financial Centre “Markaz” in its recent research titled “To Yield or Not To Yield” has examined the characteristics and performance of Yield Stocks, namely those stocks which consistently deliver high dividend yields, in comparison with Growth Stocks, or companies with consistently low dividend yields. During the course of the study, M. R. Raghu, Head of Research and Layla Al-Ammar, Analyst, identified a universe of 93 stocks which produce dividend yields. Of this universe, two portfolios were constructed, one of Yield stocks, another of Growth stocks. These two portfolios were then subjected to two forms of analysis. The first form was a comparison of the portfolios on the basis of 6 parameters, including liquidity, size, and profitability measures. In this analysis, certain characteristics emerged, whereby it was noted that Yield stocks, as a group, suffered from low liquidity (as implied by low average turnover ratio), low valuation, were typically small in size, but generated solid returns on equity. Conversely, the Growth stocks were characterized by high liquidity, large size, high valuations and good returns on equity (though, on average, lower than that of Yield stocks.) It was also noted that both groups of stocks were significantly affected by the presence of companies with skewed attributes, thereby impacting the average. The two portfolios were then compared, independently, with the MSCI GCC Index performance over the same 27 month period (31/01/2006 – 31/03/2008), where it was found that Growth stocks outperformed the benchmark whereas Yield stocks significantly underperformed. Characteristics    Yield Stocks    Growth Stocks 1. Number of Companies Analyzed    20    15 2. Liquidity    Average Turnover Ratio    0.62    1.41 Average Value Traded (USD)    851,714,891    2,855,550,392 3. Size    Average Market Capitalization (USD)    3,662,781,500    6,418,853,433 4. Valuation    Average P/E    10.06    19.23 Average P/B    1.83    2.93 5. Business Performance    Average Return on Equity %    23.02    17.38 6. Average Dividend Payout Ratio    82%    30% 7. $1 Portfolio Performance against $1 MSCI GCC $0.67 $1.03 Source: Markaz Research    50% of Yield Stocks operate in the Financial Services sector in terms of number of companies. However in terms of market capitalization weight; Oil & Gas and Telecom dominate due to the large capitalization of those companies. The group of Growth Stocks is comprised, almost entirely, of companies operating in the Financial Services sector; 9 of the 15 stocks in this group are financial institutions. In terms of market capitalization, financial institutions make up 87% of the total market capitalization for Growth Stocks. Real Estate is a distant second with 8% of the Growth Stocks market cap. Growth Stocks have higher turnover levels than the Yield Stocks, which implies higher liquidity. The average turnover ratio for this group is 1.41. In addition, growth stocks trade at relatively high P/E values, whereby the average P/E for the group is 19.23. In terms of business performance, the Growth Stocks generated an average ROE of 17.38%. The research shows that companies that offered high dividend yield suffered from poor stock market valuation and hence had low total return. On the contrary, companies that had low dividend yield provided higher total return due to capital appreciation. ### About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.3 billion as of 31 December, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd.