Dividends or growth? EQDP fund managers say capital allocation is key to valuations

The Monetary Authority of Singapore's Equity Market Development Programme (EQDP) panel discussed how listed firms should utilize their cash reserves. Fund managers emphasized that companies should either reinvest cash into avenues that yield returns surpassing the cost of capital or return it to shareholders. Shawn Ang, director of equities at Fullerton Fund Management, stated that reinvestment can lead to higher dividends in the long term, creating a virtuous cycle.

Lee Wen Ching, executive director and equity strategist at UBS, noted that many Singapore-listed companies possess substantial cash, prompting discussions on whether to pay special dividends, raise ordinary dividends, conduct share buybacks, or reinvest in growth. EQDP panellists suggested that a cash pile offers companies flexibility, with special dividends being "one and done" and less desirable than sustainable payouts.

The decision to allocate capital, whether through buybacks or investment for growth, hinges on capital allocation effectiveness. Ang advocated for higher valuation multiples, while Tan Lee Tee, portfolio manager at Lion Global Investors, stressed the importance of disciplined growth spending, which requires a robust capital allocation framework and investing only when a project's return on invested capital exceeds the cost of capital.

Tan also endorsed share buybacks as a powerful signalling tool in Singapore, especially when companies believe their shares are undervalued. Panellist Sherman Lim, portfolio manager at Avanda Investment Management, expressed no strong preference between dividends and buybacks, emphasizing the significance of sustainability and equitable profit distribution to minority shareholders for long-term valuation increases.