## Feb 5, 2012

Our mathematical analysis of Maybank’s dividend reinvestment plan (DRP) shows that with 90% of shareholders opting to reinvest their dividends, the beneficiaries are actually the shareholders who choose to receive their dividends in cash.  Their dividend yield remains an attractive 5.9% p.a. and  the growth potential of their shareholding improves from 3.8% to 6.9% p.a. thanks to the reinvestment from the other 90% of shareholders.  We are reducing our target price for Maybank from RM8.00 to RM7.80 due to EPS dilution from its DRP, and lowering our net dividend yield forecast from 6.1% to 4.0% p.a. which is a truer reflection.  HOLD maintained.

Maybank’s dividend reinvestment plan
Maybank introduced its DRP for the final dividend for FY6/10, and interim and final dividends for FY6/11.  Under the DRP, shareholders have the option of reinvesting their electable portion into Maybank shares at a discount of up to 10%.  The reinvestment rates so far have been 89%, 91% and 86% respectively i.e. an average 89% of shareholders choose to reinvest their dividends.  Dividend payout ratios (DPR) in FY10 and FY11 were 77% and 75% respectively.

In the case of a normal dividend payout
Assuming Maybank’s ROE of 15% in FY11, a DPR of 75% would imply maximum asset growth potential of (1-75%) x 15% = 3.8% p.a.  This is because asset growth is tied to growth in equity via the minimum capital adequacy ratio (CAR).  Assuming that earnings growth is tied to asset growth, EPS growth potential is limited to 3.8% p.a.  At Maybank’s current FY12 PER of 12.5x, earnings yield (EY) = 1/PER = 7.9% p.a. and a DPR of 75% translates into net dividend yield (DY) = DPR x EY = 75% x 7.9% = 5.9% p.a. So a shareholder receives DY of 5.9% p.a. and EPS growth of 3.8% p.a.

What happens when 90% of shareholders opt to reinvest?

New shares issued = dividend entitlement/adjusted share price = (90% x 75% x net profit)/(90% x (share price – gross dividend per share)) assuming the new shares are issued at the maximum 10% discount to market price  adjusted for the gross
dividend. So new shares issued = (75% x net profit)/(share price – (share price x DY/0.75)) = (75% x net profit)/(share price x (1-5.9%/0.75)) = (75% x net profit)/(share price x 0.92).  The percentage increase in new shares = new shares issued/issued shares = 75% x net profit/(share price x 0.92)/issued shares = 75%/0.92 x (net profit/issued shares)/share price = 0.82 x EPS/share price = 0.82 x
EY = 0.82 x 7.9% = 6.5%.

Earnings growth potential = retained portion of ROE = ((1-DPR) + 90% x DPR) x ROE = (25% + (90% x 75%)) x 15% = 13.9% p.a.  EPS growth potential diluted for the new share issue = 1.139/1.065 = 6.9% p.a.

We also have to take into account that the shareholder who opts to reinvest his dividend will see his shares increase by (percentage increase in new shares)/(percentage of shares owned by him) = 6.5%/90% = 7.2%. So his share of
net profit rises by (percentage increase in shares  owned by him) x (diluted EPS growth) = 1.072 x 1.069 = 14.6%.
So the shareholder who opts to reinvest his dividend receives DY of zero and EPS growth of 14.6% p.a.
Whereas the shareholder who opts to receive his dividend in cash, receives DY of 5.9% p.a. and EPS growth of 6.9% p.a.

To cut a long story short
With Maybank’s DRP as it stands, the shareholders who reinvest their dividends are “giving away some of their growth” (14.6% instead of 15.0%) to the shareholders who opt to receive their dividends in cash (they continue to enjoy an unchanged dividend yield of 5.9% p.a. but better growth of 6.9% compared to 3.8% thanks to the reinvestment from the other 90% of shareholders).

Table 1 below illustrates a summary of the above analysis:
‘A’ is what a shareholder gets if Maybank does not declare any dividend i.e. no yield for maximum growth potential of 15% p.a.
‘B’ is what a shareholder gets if Maybank has a DPR of 75% cash i.e. 5.9% p.a. dividend yield but Maybank’s growth potential drops to 3.8% p.a.
‘C’ is what a shareholder gets if he opts to reinvest his dividend and 90% of shareholders do so i.e. no yield for growth of 14.6% p.a.
‘D’ is what a shareholder gets if he opts to receive his dividend in cash while 90% of shareholders reinvest their dividends i.e. 5.9% p.a. dividend yield with growth of
6.9% p.a.
‘D’ is thus better off than ‘B’ while ‘C’ is worse off than ‘A’.

Valuation and recommendation
We are reducing our target price from RM8.00 to RM7.80 per share, following a 2% reduction in our FY12 EPS forecast.  This is taking into account the 2% increase in Maybank’s issued shares from its DRP for the final dividend of FY6/11.

We are lowering our DPR forecast from 75% to 50% so its forecast net dividend yield is now 4.0% compared to 6.1% previously.   Our valuation of Maybank is derived by applying a PER of 12x to our forecast FY12 EPS which has not assumed
any further dilution from new shares issued under its DRP.  Implicitly, without reinvestment of dividends, we have to assume a DPR of only 50% to be consistent with an asset growth of 8% p.a. and ROE of 15-16%.

Although Maybank could continue to declare a 75% DPR, it would either require reinvestment of dividends (which would dilute EPS through the issue of new shares), or pay out from its excess core capital (which is not sustainable in the long
term).

We maintain a HOLD recommendation.  Maybank’s share price has remained flat since our Results Review dated 15 November 2011 where we recommended a Hold with target price of RM8.00.  Although we have reduced our target price and dividend yield forecast, total expected return is close to zero so the stock remains a HOLD.

by ECMLibra