Rising Yields a Plus for Stocks

By Mark DeWeaver.

Falling prices and higher dividends have led to a jump in ISX dividend yields this year. As of September 30, Rabee SecuritiesRSISX index was yielding 4.5%, up from 1.5% in 2013 and 0.0% in 2012. Yields are also improving relative to local interest rates, which have been gradually declining.

The RSISX yield is now above Rafidain’s 4% savings deposit rate and is approaching the average deposit rate for all Iraqi banks. (See chart. Yield calculations are based on period-ending prices and index weightings. Average deposit rates are from Rabee’s most recent Bank Sector report.)

The conclusion of the last three years’ bank capital increases (see this post) is the main reason for this trend. Now that most banks have finally met the central bank’s IQD 250 bn capital requirement, a number have switched from making cash calls to paying cash dividends. So far this year, 7 of the 21 listed banks have made dividend announcements, compared to only 2 in 2013. The 7 include RSISX constituents BIME, BBOB, and BIBI along with BASH, BIIB, BNOI, and BMNS.

While foreign institutional investors—who generally are looking for capital gains rather than dividends—may be unexcited by this development, the local individuals who account for most of the trading are likely to see it in a more positive light. For them, cash payments are a sign that a company has actual earnings—something it’s hard to be sure of when financial reporting is viewed as unreliable. Locals are also more likely to compare dividend yields to deposit rates, bank accounts being the only other domestic financial asset available.

Since any further price declines would push the yield above the deposit rate, this year’s dividends should help to put a floor under the market at its current level. Assuming no deposit rate changes, we might expect this level to hold as long as aggregate dividends remain constant or rise.

I think this is a likely scenario, despite the recent decline in bank earnings (see my last post). While dividends at individual banks may fall, the number of banks paying them can be expected to increase now that almost all of their capital targets have been met.

Yields could even head higher.

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