18 March 2009

South Africa: Not Paying a Dividend is Now a Sign of Prudence


Johannesburg — WHEN Highveld Steel & Vanadium this week declined to pay a final dividend, despite record year-end profits, its share price gained almost 4%.

It's another sign of how much times have changed. Once, a company's share price would have fallen if it had passed its dividend, with investors assuming that this was a signal of desperate times to come. Now, conserving cash is seen as a priority in a downturn that might last a long time. The number of companies, opting to cut dividends or waive them altogether is growing, particularly in finance and in mining.

Anglo Platinum passed its final dividend, citing uncertainty about the timing of the recovery; so did parent Anglo American, which has halved its capital spending programme. Impala Platinum more than halved its dividend, saying "cash preservation has become our top priority". Sasol cut its dividend and is reviewing its R70bn capex programme. In financial services, Mutual & Federal passed its dividend for the first time and parent Old Mutual talked about "responsible capital management" as it waived its final dividend and suggested there might be no payout next year either.

After decades in which shareholders could rely on dividends increasing constantly in line with earnings, they are being forcibly reminded that equities are the riskiest of all asset classes, and that if there are losses, shareholders must take them first. But what's striking about the current crop of dividend cuts is that they aren't coming from struggling companies: they are, rather, being used as a financing tool at a time when markets have frozen up and cash and credit are in short supply.

The ailing banks in the US and Europe that waived their dividends had no option: their capital was wiped out by losses on toxic assets and they didn't have the cash to spare. But companies in other sectors have followed suit, with 13 Wall Street companies suspending dividends last year and 15 companies in Europe doing the same

Cutting or eliminating the dividend was "a step historically viewed as a last resort", says a report by Citigroup Global Markets. But the last few months have seen US and European companies do this at the highest rate in the past 50 years, with many more debating whether this is "a prudent capital management step in a highly uncertain economic environment". A dividend cut can make sense because it allows the company to keep investing despite the downturn. It can support its credit rating, allow the company to make acquisitions or even pay off more expensive forms of capital, Citi's analysts suggest.

It's because companies here seem to be treating the dividend as an option to get through tough times that investors seem on the whole to be supportive. If cutting the dividend means a company can continue investing for the long term, despite trouble in the short term, it can only be good for shareholders, if they're willing to see through the cycle.

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