The universe of stocks on the local bourse may be dwindling at a worrying rate, but the JSE Ltd is a well-run business that is providing rich yields for shareholders.
Older readers might remember the time, before the JSE was listed, when adventurous investment group PSG was determined to build a significant strategic stake. However, PSG was unable to overturn the ownership limitations on individual shareholdings (these remain in place still) and eventually walked away.
These days the JSE — which at last count had several local and foreign institutions at the top of its share register — is not quite as coveted. The share trades at a modest forward earnings multiple of about 10, which is not the rating usually associated with a specialist financial services business, let alone one that still pretty much enjoys a monopoly in SA.
But, while the JSE has lost roughly a quarter of its market value over three years, the group has produced a steady enough financial performance to underpin a generous dividend policy.
In the year to end-December 2021, operating revenue crept up just 3% to R2.5bn, while earnings before interest, tax, depreciation and amortisation was flat at just over R1bn.
At the recent AGM, JSE CEO Leila Fourie noted that the financial performance was driven by a cash-generative business model as well as contained cost growth of just 4% — “which allowed us to retain a solid yield for our investors”.
It has been the JSE’s habit to return distributable cash to shareholders after ring-fencing cash for regulatory capital requirements and investments (including capital expenditure and inorganic opportunities).
The financial 2021 dividend of 754c a share was a 4% increase on the 725c a share paid in 2020. But the JSE — which now sits on a cash balance of R2.4bn — also forked out a special dividend of 100c a share last year.
Yield-seekers will lap up the JSE’s distribution policy. The ordinary dividend payout ratio was equal to 92% of distributable profits in 2021 (2020: 83%), and it is the JSE’s policy to maintain a most generous dividend cover ratio of 1-1.5 times. This payout range reflects that cash generated by the JSE exceeds net profit after tax — which is mainly the result of the amortisation of (hefty) technology investments in previous years.
The JSE currently holds a yield of more than 7%. That’s surprisingly ahead of dividend machine British American Tobacco, but is hopefully not a market pronouncement on the group’s status as “ex-growth”.
In the latest JSE annual report, outgoing CFO Aarti Takoordeen says the dividend trend is expected to continue for the next few years, and will be influenced by changes in the group’s depreciation and amortisation profile. “The board is confident that the existing dividend policy is congruent with the group’s inorganic growth strategy over the near term,” she says.
The JSE could be in for another satisfactory year in 2022, remembering that volatility drives trading volumes in the bourse — and there’s been plenty of that about.
In the 2021 financial year the JSE equity market’s billable value traded was up 5%, but transaction volumes were down 12%. The JSE reckons this is a good outcome, considering the high base set as a result of the volatility in the immediate wake of the pandemic in 2020.
But in August last year the bourse saw record activity due to the Naspers and Prosus restructuring, which spurred huge trading waves. The JSE disclosed that the value traded on August 17 2021 hit a record high.
Things are still cooking on the JSE, and Fourie reported at the AGM that in March — and in the immediate wake of the Russia/Ukraine crisis — the market saw a record average monthly trading of R49bn. She added that it was pleasing to see how the JSE responded to the Russia/Ukraine conflict — particularly the turnaround to net foreign investment inflows of R18bn to reverse a three-year trend.
While the ongoing delistings trend still takes some shine off the JSE’s steady financial performance, the annual report does reveal that the number of exchange traded funds (ETFs) increased by nine to 85, bringing the market cap of listed ETFs to more than R100bn.
What’s more, 26 new exchange traded notes (ETNs) were listed, bringing the total number to 87 and overall market capitalisation to R18bn.
The number of ETFs increased by nine to 85, bringing the market cap of listed ETFs to more than R100bn. What’s more, 26 new ETNs were listed, bringing the total number to 87 and overall market capitalisation to R18bn
Of course, there are questions around whether the JSE missed a trick in not embracing the cryptocurrency market.
At the AGM, mining financier Paul Miller pointed out that crypto trading platform Luno boasts five times as many individual trading accounts as the JSE. The vibrant local crypto market also raises questions around the JSE’s plans to woo retail investors, given that SA has the potential to build a sprawling middle class.
Fourie emphasised that the JSE is aware of the opportunity to bring more retail investors to the market — noting that retail investment participation in equity markets has grown globally. This, she said, will mean improving access to the JSE, addressing pricing for retail investors, and setting up financial and investor education.
More immediate growth strategies — and perhaps easy money, considering the JSE’s dominant market position in Southern Africa — will involve transitioning new data products and services into cloud-based solutions to support evolving client needs and to unlock new opportunities. Then there’s potential to expand geographical consumption of JSE market data through new partnerships, as well as the regular expansion of analytics services and new data assets.
No doubt — in terms of specialist financial services providers — the JSE is not exactly as sexy as Transaction Capital or even as pregnant with promise as fintech forager Capital Appreciation. But for investors seeking a company with a sturdy business model, low-risk new growth initiatives and rich payouts for the foreseeable future, the JSE is good value for just over R100.
The JSE could be in for another satisfactory year in 2022, given that volatility drives trading volumes — and there’s plenty of that about
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