Companies Reinstating Cash Dividends to Shareholders

Dividends have become a focal point for investors and shareholders eager to earn returns from dividend-paying companies.

Companies often pay dividends to return a portion of their profits to shareholders as a reward for their investment. This practice is particularly attractive to investors seeking regular income, such as retirees. Paying dividends can signal a company's financial health and stability, suggesting that the company generates sufficient cash flow to distribute profits while still reinvesting in its growth.

PPC Limited, Rolls-Royce, and International Airlines Group are among the companies that recently announced their intention to restart cash dividends to shareholders.

PPC Limited declared its last dividend in November 2015 (paid in January 2016). Following this payment, the company highlighted that its dividend policy considers “the growth phase and trading conditions,” resulting in a halt to dividend payments. Due to the significant deleveraging of the South African and Botswana groups this year, the board has declared an ordinary dividend and amended the distribution policy, calculating it in two parts:

• "A distribution in an amount that would result in the target leverage range for the South African and Botswana group being net debt at or below 1.3x - 1.5x the South African and Botswana EBITDA, before dividends from Zimbabwe; plus
• A distribution of an amount up to the gross dividend received by PPC from Zimbabwe."

In 2020, the COVID-19 pandemic created widespread disruptions across industries, leading to reduced revenues, increased costs, and uncertain future cash flows. By suspending dividend payments, companies were able to redirect their available cash to cover essential operational expenses, manage debt obligations, and maintain financial stability in an unpredictable environment.

International Airlines Group and Rolls-Royce PLC were among the companies severely impacted by COVID restrictions, hitting all-time lows during the pandemic. These companies also halted dividend payments to shareholders, redirecting capital to growth. Both companies have recently indicated they are likely to reinstate cash dividends to shareholders.

International Airlines Group

“As of 31 December 2023, International Consolidated Airlines Group S.A. (UK) had no restrictions on dividend payments from its main operating companies, except for British Airways, which has undrawn committed credit facilities with conditions affecting the scale of any dividend paid to the Company.”

For the first quarter of 2024, International Airlines Group saw strong demand drive higher revenue and increased operating profit to €68 million from €9 million in Q1 2023. Passenger capacity grew by 7.0% compared to Q1 2023, with non-fuel unit costs meeting expectations. The balance sheet strengthened, with net debt to EBITDA before exceptional items improving to 1.3 times from 1.7 times at the end of 2023 and 2.1 times in March 2023, positioning the group well for the summer. 

Rolls-Royce PLC

“Rolls-Royce PLC (UK) plans to re-establish shareholder distributions once the balance sheet is strengthened. Thereafter, the company will balance between shareholder distributions and further business investments.”

In 2023, Rolls Royce achieved an underlying operating profit of £1.6bn with a 10.3% margin, driven by strategic initiatives. Record free cash flow reached £1.3bn, and return on capital more than doubled to 11.3%. Statutory net cash flow from operating activities rose to £2.5bn, while net debt decreased to £2.0bn from £3.3bn. For 2024, Rolls Royce expects an underlying operating profit between £1.7bn and £2.0bn and free cash flow between £1.7bn and £1.9bn.

In August, both Rolls-Royce and International Airlines Group are expected to release their half-year financials for 2024.

Halting dividends serves as a proactive measure to safeguard against further economic shocks and redirect capital towards growth. Kelly Partners Group Holdings Limited (Australian-listed) paid its final monthly dividend in February 2024 and stopped dividend payments thereafter. The company highlighted that its decision aims to better allocate and invest capital into new opportunities. The FY23 final dividend was not paid to fund acquisitions in California.

A company adjusts its dividend policy based on financial health and growth prospects. If it needs cash for investments, it may reduce or suspend dividends, while strong cash flows and limited opportunities may lead to increased dividends to return excess cash to shareholders, boosting satisfaction and stock price. Share buybacks also return cash to shareholders by reducing the number of outstanding shares, increasing the value of remaining shares and potentially boosting stock prices. Buybacks can be more tax-efficient than dividends and enhance investor sentiment and stock performance.

Conclusion

Reinstating dividends usually boosts the share price by signalling financial strength and attracting income-focused investors. The opposite is also true: halting dividends can cause the share price to drop, as it may indicate financial trouble or a strategic shift, reducing its appeal to dividend-seeking investors.

Investors should monitor changes in a company's dividend policy, as they often indicate its financial health and strategic focus. Companies might cut dividends to conserve cash for growth initiatives like expansions or acquisitions. Alongside increasing dividends in an attempt to boost stock prices, share buybacks are another tool to return cash to shareholders, signalling confidence and potentially increasing share value. This can be more tax-efficient and enhance investor sentiment.

In the intricate world of finance, money is the lifeblood that fuels economies, shapes markets, and drives innovation. Yet, how much do we truly understand the journey of money from its inception to its role in our daily lives?

The year 2024 is poised to become a landmark moment in history, with over 2 billion people worldwide preparing to cast their votes in elections spanning countries like the US, India, the European Union, Mexico, and South Africa, as highlighted by the World Economic Forum.

As countries return to work to ensure food security while working on the energy transition: there are potential opportunities in the electric vehicle (EV), energy supply, and fertilizer sectors.