High dividends, along with attractive valuations and potential for growth, are often cited as a major benefit of frontier markets. Some countries offer close to 8%, with Pakistan boasting an average dividend yield of 7.7%.
The MSCI Frontier Markets Index’s dividend yield was 5.3% as 31 Dec, 2011. This compares with 2.7% in both the MSCI Emerging Markets Index and the MSCI World (Developed) Index.
Brudenell, manager of the HSBC GIF Frontier Markets Fund, explained that frontier markets have a culture of ‘liking the dividend’. This stems from the fact that many are family-owned business that have listed and are still relied on by the family for income while others are partially owned by the state.
“Some of them, however, should probably be giving less in dividends and re-investing more in growth for the future. That’s exactly what we talk about when we meet with management teams,” the manager said.
“We do meet with company management and say: ‘You’ve just decided on a massive dividend three months ago and now you’re doing a rights issue. What are you doing?’”
Despite this, Brudenell stressed that many frontier market companies attempt to establish a balance between high dividends and proper use of capital. These firms tend to have strong balance sheets and do not issue debt to fund dividends, he added.
The manager noted that a number of companies owned by the HSBC GIF Frontier Markets Fund pay high dividends while allocating their capital in an efficient manner.
These include Pakistan’s Hub Power with a dividend yield of 14.2%, Croatia Telecom at 10.7% and Nigeria’s Zenith Bank at 7.4%.
“There are some shocking companies [in frontier markets] that really struggle to understand the business they own, the fact that they’re in a business cycle and how to allocate capital,” Brudenell said.
“But make no mistake about it, there are some really great companies that are going to be the Walmarts of their country and become shining examples of great businesses.”
