SARB joins the chorus: Save dividends for another day

The South African Reserve Bank has issued an instruction to the SA banking community that no dividends should be paid to shareholders and no bonuses paid to executive officers in 2020.

This is a quid pro quo for the substantive temporary regulatory relief provided to banks by the Prudential Authority (PA), the regulatory arm of the SARB.

On Monday night the PA announced regulatory relief measures in the form of capital relief on restructured loans,  a lower liquidity coverage ratio and lower capital requirements. These measures are designed to ensure that banks can support their clients through the economic crisis precipitated by the lockdown to prevent the spread of Covid-19.

"It is essential that banks conserve their capital resources, among others, to retain their capacity to support the real economy in an environment of heightened uncertainty caused by Covid-19," said Kuben Naidoo, deputy governor and CEO of the Prudential Authority in a statement.

"In addition to supporting the real economy, capital resources must also be available to absorb losses that may result from an economic downturn. As such, capital conservation must take priority over any distribution of dividends on ordinary shares and the payment of cash bonuses to executive officers and material risk-takers," he said.

The SARB guidance may provide a small measure of comfort to shareholders disappointed at the withholding of dividends by companies across the JSE.

Since the start of the partial lock-down two weeks ago almost a dozen JSE-listed companies have resorted to cancelling or delaying dividend payments as management teams focus on preserving liquidity over the coming months.

Thus far the companies that have cancelled dividend payments include automotive operator Motus, Texton Properties, construction firm WBHO, and UK property firm Hammerson. Mining and marketing company Gemfields released strong results in April, but elected not to declare a dividend. 

The fallout from Covid-19 will have a material adverse impact on its operating and financial performance in 2020, Gemfields said.

“Widespread travel and freedom-of-movement restrictions mean that our gemstone auctions, which provided about 93% of our revenues in 2019, are on hold for an unknown period of time."

Others like battery maker Metair, SA Corporate Real Estate, AECI, Spur and Libstar have simply deferred the payment of dividends until the future is more certain. The likes of RDI, the income-focused UK Real Estate Investment Trust, Liberty Two Degrees and Netcare have warned that they may amend their dividend policies, come results time.

Globally companies with vulnerable balance sheets like airlines, property companies, oil and gas operators, as well as those at the coal face of the lockdowns such as apparel retailer H&M are cutting dividends. 

The cautious stance is captured in the Hammerson update to investors:

“While the board remains confident in the financial position of the business, it is clear that Covid-19 will have a material impact on the Group in 2020. As a result, the Board has decided that it is no longer appropriate to recommend the final dividend of 14.8 pence per share for the financial year ended 31 December 2019.”

Given the uncertain environment (albeit potentially a short-term issue) it is prudent for companies that have high operating leverage and elevated gearing to preserve capital in this environment, says Claude van Cuyck, portfolio manager at Denker Capital.

“It is a reminder to management teams to refrain from taking on too much gearing and for investors to stop criticising “conservative” management teams from having “lazy balance sheets”,” he says.

As Johann Rupert once reminded investors, “you only appreciate the value of cash on the balance sheet in tough times”.

This will be disappointing to investors, already hammered by stock market losses, some of whom depend on dividends for income. 

Ideally, companies that are not geared in this environment can probably afford to pay dividends, says Van Cuyck.

This was the case with Santam and Sea Harvest, which have recently paid dividends and Sanlam, which will pay a dividend on 20 April. 

Quilter, the UK wealth management business, has announced a share buy-back programme, which is another way of returning cash to shareholders.

The SARB is not the only regulator to request that banks suspend dividends. "Many large European and UK banks have suspended their dividends on regulators’ urging," says Pieter Hundersmarck, portfolio manager at Flagship Asset Management.

Barclays, Royal Bank of Scotland, HSBC, Lloyds, Santander and Standard Chartered all suspended dividend payments.

The banks also pledged not to buy back shares.

In the normal course of events, withholding dividends sends a negative signal to the market, creating a perception that the company is in financial distress. But under the current circumstances, where many companies are not generating any cash owing to Covid-19 lockdowns, companies can be forgiven for being more conservative, says Van Cuyck. 

This is especially true when companies weigh up appeasing shareholders in the short term, versus ensuring the long-term sustainability of the business — which is in the best interests of shareholders in any event. 

On the other end of the spectrum, a company like Royal Dutch Shell is borrowing heavily to pay its dividend, despite the enormous uncertainty in the oil market. In light of the virus and uncertainty in the oil market, investors have to wonder how wise this is.

Ruen Naidu, head of multi-assets at Argon Asset Management, understands the frustrations shareholders may have over cancelled dividends, but adopts a pragmatic stance.

“Investors have a choice of where in the capital structure to invest. Those that are hard bent on earning streams of income should lower their return assumptions and stick with bonds, especially if they have a lower tolerance for uncertainty around those cashflows.”

Shareholders should always be aware that somewhere within the distribution of potential outcomes, dividends could be suspended. 

“Randomness prevails in the real world, and capital allocation decisions are there to be revised when a black swan event occurs,” he says.

The shareholders unhappy about dividend deferrals are the same ones that criticise management teams for holding conservative cash buffers and pushing them to invest those funds — as Rupert famously alluded to.

“The natural consequence of this is that cash will have to be raised when it is difficult to do so, usually by cutting dividends,” Naidu says. “So indeed, shareholders should be punished for rewarding a focus on short-termism and for inappropriate risk assessment.”

In 2009, Rupert warned impatient investors that the time had not yet come to throw caution to the wind. At the time Remgro had R5.05-billion worth of cash on its balance sheet and investors wanted that capital to be deployed.

However, memories of the Great Financial Crisis ran deep and Rupert expressed horror at the bank bailouts that had occurred in the UK and the US. The bailouts, he said, suggested a public policy of “privatising profits and socialising losses”.

This was a mistake made during the GFC in developed economies and is clearly one that the SARB does not intend to replicate. BM