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Beware bad weather in dividend farming

Apr 07 2011 11:31 Vic de Klerk

Company Data

BRITISH AMERICAN TOBACCO PLC [JSE:BTI]

Last traded 634.05
Change -6.35
% Change -0.01
Cumulative volume 73332
Market cap 1.28tr

Last Updated: 30/09/2014 at 11:20. Prices are delayed by 15 minutes. Source: McGregor BFA

WOOLWORTHS HOLDINGS LIMITED [JSE:WHL]

Last traded 69.05
Change 0.65
% Change 0.01
Cumulative volume 589135
Market cap 70.07bn

Last Updated: 30/09/2014 at 11:21. Prices are delayed by 15 minutes. Source: McGregor BFA

MMI Holdings Limited [JSE:MMI]

Last traded 26.26
Change 0.06
% Change 0.00
Cumulative volume 297645
Market cap 41.22bn

Last Updated: 30/09/2014 at 11:18. Prices are delayed by 15 minutes. Source: McGregor BFA

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THINGS aren't going all that well with my dividend farming.

Share prices now tend to fall more on the first day following the ex dividend date than the dividend itself.

In short, the speculator/investor (quite an interesting concept, isn’t it?) would have been better off buying the share without the dividend on the Monday rather than the Friday buying that catches the dividend.

But no, my dividend farming is actually doing quite well – if you look at it over a longer term than Friday to Monday.
 
Readers will remember that in Finweek of March 4 – which was available from Monday February 28 – we strongly recommended buying Woolworths shares before the close of trading on March 4.

For most of that week the share traded at around 2 600c. The price is currently 2 750c and a dividend of 50.50 cents per share was paid into investors’ accounts on March 14. That’s nice.

And our prediction of a return of 15% (the dividend and capital together) on Woolworths Holdings [JSE:WHL]over the next 13 months looks as if it will be achieved very soon.

But elsewhere things aren’t going too well, and in the current weak market we should perhaps think again about this kind of farming – especially if the term is too short.

Look at the old big gun British American Tobacco [JSE:BTI].

Investors who bought the share before March 4 qualify for the 935c dividend to be paid on May 5. In the week preceding March 4, the share was trading at around R280.

Deduct the dividend and the effective cost price falls to just more than R270 for the dividend farmer.

However, BAT is currently trading at only R265. So the dividend farmer effectively paid 1 500c for a 935c dividend. It sounds as bad as ordinary farming.

A few other shares did exactly the same thing between Friday and Monday last week.

MTN’s price fell by 457c after a 349c dividend. Anglo American’s share price lost 499c after its rather modest dividend of 289c.

The price of AVI fell even more sharply – by 140c – in exchange for the dividend of 50c/share. That’s not good business.

The new listed insurer – MMI Holdings Limited [JSE:MMI] – did slightly better and its share price fell by only 65c between Friday and Monday after a dividend of 63c/share.

I burnt my fingers – fortunately, only lightly – and there are a few clear lessons to be learned.

The current share market is too weak for you to try playing the Friday/Monday cum and ex dividend game.

But the view and the steps taken – as in the case of Woolworths, where the predicted cash dividend return of around 8% over the next 13 months was enough to convince the investor to exchange his deposit at the bank, where it’s earning 5% – for the dividend are the right approach.

There’s no such thing as day-to-day farming. That’s what someone hawking vegetables does.

Just like ordinary farming with mealies, the dividend farmer has to look at the full season. Try to pick up the three dividends – final, interim and final again – within 13 months and take the possible increase in the share price as a bonus.
 
Enjoy your farming. Unfortunately, there’s nothing that caught my eye last week.

* This article was first published in Finweek.

* To read more Finweek articles, click here.


mtn  |  woolworths  |  dividends  |  share prices
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