CM-CIC: Playing The Dividend Game In France

The analysts at CM-CIC Securities have compiled equity strategy report with a focus on dividend plays in France. Key considerations are as follows:

Attractive yields. When the stock markets decline, yields naturally become more attractive: based on the dividends paid in 2009 for 2008, 45 stocks out of the 172 analysed (i.e. 26% of our sample) show a yield of over 5%. Given the challenging outlook on the markets, the likelihood of a return for shareholders via capital gains is far from certain. The dividend yield therefore is the only return that shareholders can hope for this year.

A risky environment due to the economic downturn. The economic downturn, the negative outlook for 2009 and the lack of liquidity all suggest that it would be better to hold on to available cash rather than distributing it to shareholders. Added to this is the general pressure on balance sheets as a result of which there is growing uncertainty that companies will be able to continue applying dividend policies, particularly given that the option of reducing cash outflows by reducing capex has already been accounted for. The last resort for companies therefore is the shareholder pay-out policy.

Additional political pressure when public money is at stake. On top of this is political pressure as it seems increasingly certain that the government will look to cancel dividend payments by companies that have received assistance (banking and automotive sectors notably), given that in a time of crisis it will not want public money to be used to remunerate private shareholders. At this point, and for 2008, French banks seem to be spared this measure, but we cannot rule out more radical measures if the situation gets worse.

Search for a balance between employees and shareholders? Over the last thirty years, the share of employee and employer contributions in total value added has fallen from 74% to 66%, to the benefit of companies and shareholders. Against this backdrop, and with employees coming under ever more pressure (growth in the number of redundancy plans), it will be very difficult for certain companies to pay dividends to shareholders without going against public opinion.

Did you expect friendly environment?