Banking & Finance

Open sesame

Food firm bucks dividend trend with special offer

Open sesame

Fancy a dividend of tortoise jelly?

When “sesame and mung beans” are at stake, goes a Chinese idiom, very little of value is likely to be up for grabs.

The A-share market has just given the old saying a new lease of life. Under scrutiny from regulators, listed firms have been under pressure to increase dividends. Normally that means cash. But not in the case of Nanfang Foods which instead decided that it would send shareholders some black sesame instead. The move swiftly grabbed national attention, with the little-known sesame maker becoming something of a laughing stock.

In a regulatory filing earlier this month, Nanfang said 12 boxes of black sesame seeds – which are used to make sesame paste – would be distributed for every 1,000 shares held. The Shenzhen-listed firm said the exercise is intended to solicit feedback from shareholders on a new product. But as the company hasn’t returned a penny of its earnings to shareholders for 11 years, it was also the first case of asset distribution to shareholders in China’s financial history.

“Several thousand dollars [the price of 1,000 Nanfang shares] for a bowl of sesame paste. Isn’t that a vivid illustration of our stock market?” one commentator griped in Shenzhen Economic Daily, feeding off widespread frustration that the A-share market has been good for fundraising but offers paltry returns for minority shareholders.

“At least you’ll have something sweet to chew on,” a netizen laughed.

About 13,000 shareholders qualify for the unorthodox payout and the largest institutional shareholder, China Asset Management, is entitled to receive over 60,000 jars of black paste. According to the Economic Observer, none of the top 10 shareholders in Nanfang Foods has confirmed that it wants its dividend delivered.

Some see the move as a smart marketing exercise and there are signs that other firms may follow. Shenzhen-listed Quantum Hi-Tech grabbed a little of the limelight by declaring a distribution plan for tortoise jelly, a Chinese medicine and dessert accumulated by boiling turtle shells for hours. Humanwell Healthcare, a healthcare product firm, then made the kind offer of a complimentary condom to each of its shareholders. Or if that wasn’t to their liking, investors could receive a free HIV-test kit instead.

If it all sounds a little ridiculous, the dividend plans does raise serious accounting issues. “These aren’t free lunches,” the Beijing Times declared sagely (although presumably the tortoise shell dessert might qualify). The newspaper warned that some firms could simply unload their inventories to shareholders, complicating their financial statements in the process.

Dividends have been a focus for the China Securities Regulatory Commission (CSRC) for a while and it has issued numerous administrative guidelines trying to encourage larger payouts. Apparently the efforts has been paying off. According to the Investor Journal, last year saw “the most generous dividend payout” in Chinese history. Among the 1,269 listed firms that have reported financial results, 80% have returned something to shareholders. Yields are up a fraction too, and 64 firms are offering divided yields higher than 3.25% (the one-year deposit rate set by the central bank).

Some of the biggest payouts came from financial services firms, the most profitable sector. Among the top 20 yield plays, seven are state-controlled banking giants. At current share prices, the big five state lenders are all offering dividend yields higher than 5%.

Of course, sweeter yields can sometimes be a more bitter reflection of a weaker underlying share price. ICBC, the world’s most profitable bank, is currently trading at a market value of Rmb 1.4 trillion. ($226 billion). That is only six times its 2012 net profit. But ICBC will return more than 40% of last year’s earnings to shareholders (a “respectful” ratio, says the Investor Journal, as long as banks stop going back to shareholders to recapitalise themselves via massive right issues).

The CSRC is now seeking to boost the trend with a differential tax on dividend income, which came into effect in January. The longer investors hold a stock, the lower the tax on dividend streams, in a rule change also aimed at curbing short-term speculation.

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