Uneasy with WITCO’s dividend flight

Tobacco stocks are traditionally defined as “consumer/non-cyclical”, meaning that even in times of business cycle downturns, these companies outperform others that are more sensitive to economic swings. This makes these types of shares good defensive stocks that earn relatively high dividends and more or less maintain their value. The main factor that contributes to this is the inelastic demand for the product meaning even when prices increase, demand remains fairly constant.” For this reason a tobacco stock is a good addition to an investor’s portfolio since the stock provides the required stability and earnings for the investor to take more risks when diversifying portfolios.

Consequently, West Indian Tobacco Company (WITCO) has focused on increasing its market share through the CARICOM territories.  Revenues derived from the region grew by TT$7.8m (11%) in 2002. The regional contribution is notable as total sales (regional and domestic) increased by 13% from TT$388.4m in 2001 to TT$439m in 2002. Increased Turnover was met by an 8% reduction of product cost.  This was a result of “the Company’s initiative to strengthen strategic alliances with suppliers.” “This achievement is directly attributable to improved materials management and the development of improved processes and systems across the Supply chain” explains the Managing Director, Anthony Phillip. “Total operating expenses increased by 7%” from a 2001 position of TT$91.5m to TT$112.2m.  The increase resulted from the investment in “projects aimed at increasing efficiencies in our primary and secondary supply chain coupled with significant increase in our insurance cost.  These projects have already begun to impact significantly on operating efficiencies” (i.e. reduction in product cost.) The combined effect has been to increase operating profit by 19.4% to TT$113.6m in 2002 from TT$95.2 in 2001 with after profit tax growing by 22% to TT$75.9m from TT$62.2m in 2001. It is safe to predict that these initiatives will continue to reduce product cost and  increase operating profit if all other things remain equal.  The five year data (1998 to 2002) supports this assumption as after tax profits almost tripled (265%) from the 1998 position of TT$28.1m to the 2002 position of TT$75.9m.

WITCO’s Balance Sheet reflects a stable and mature company.  The company is without debt and is obligated in the long term to the government (deferred taxation of TT$14m) and to its employees (Retirement and post employment medical benefits of TT$4.3m.) Cash in hand of TT$19.6m with short term deposits of TT$8m provide the company with a healthy assets to liabilities ratio of 2:1; the removal of the inventory reduces the ratio to 0.73:1. The company has a 36% efficiency utilisation rate on its assets. The company is seizing the opportunity to boost production and sales potential through the implementation of aforementioned initiatives.  Factory output rose “to new record levels with a volume increase of 3.5% over 2001”.  Utilisation rates will increase in the short term. WITCO’s 2002 Financial Statement is an investor’s dream.  The company will distribute 97% of its after tax profits as dividends to shareholders, and maintain the remaining 3% for the Revenue Reserves of the company.    50% of the dividend will be remitted to the British American Tobacco Company (BAT), and 12% to Colonial Life Insurance Company (Trinidad) Limited (CLICO) in accordance with their shareholdings. The company has opted to pay out large portions of the after tax profits to shareholders instead of growing the revenue reserves of the company. Over the five-year period the company’s reserve or equity position has grown by only 24% while assets and after tax profits have grown by 43% and 265% respectively.

A company’s reserves show the commitment of the company’s shareholders to the future growth and longevity of the company and an indication of what they are willing to risk for that opportunity. WITCO’s expression of commitment is that it has “raised the level of our corporate sponsorships, providing increased support for the development of sport and promotion of culture in the country”.  The reader needs to be aware that these are tax deductible expenses and reduce the tax payable (to the Government) at the end of the financial period.  The company benefits from these sponsorships as well. The real story of a company’s contribution to a national perspective is in the levels of equity it maintains. This is a statement of intent. In real terms 50% of WITCO’s after tax profit leaves the company, the real beneficiaries of a strong profit position are not resident in Trinidad and Tobago.

None of the stakeholders seem to have a problem with this approach.  The Seamen and Waterfront Workers’ Trade Union (SWWTU), representatives of the hourly and monthly paid employees, has not made any statements about this.  Shareholders are themselves compromised since their main concern is in making money in the short term to recover their investments. Even though product demand remains fairly constant, tobacco is a luxury item. Sales will be boosted by increases in disposable income in the market. Expectations are that WITCO will continue to do well.  The company will responsibly market its products as stipulated by the “International Products marketing Standards.” Considerable profits will be made and shareholders will enjoy large dividends; 50% of which will be remitted overseas.

Maxie Attong is a financial& management consultant.
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