The decision by Veolia and Suez Environnement to offer a scrip dividend alternative this year clearly demonstrates that both companies are still very much in deleveraging mode.
On 27 June, more than 78% of Suez Environnement shareholders took up the offer of receiving their 2010 dividend in shares, while nearly 64% of Veolia shareholders did so on 15 June. In each case, the company’s outstanding stock was diluted by around 4%.
In a deleveraging environment, the rationale for offering a scrip dividend is clear – the company can maintain its dividend payout ratio whilst raising capital via the back door to improve key ratios. While Veolia pursued this policy in 2008 and 2009 (it paid 58% of its 2009 dividend in shares), the decision by Suez Environnement management to break with tradition came as more of a surprise.
“I think initially they were assuming that the Agbar acquisition would be absorbed easily with free cash generation from the operating side of the business,” commented Damien de Saint Germain, an analyst at Cheuvreux. Although Suez did succeed in bringing its net debt to EBITDA ratio down to within 25 basis points of its target by the end of last year, this was partly attributable to the €750 million hybrid issue it launched back in September. “The way they have done it is not related to improved operating performance, and what the market wants to see is a recovery at the operating level,” said Saint Germain.
While the scrip dividend should enable Suez Environnement to maintain its short-term payout commitment, the fact that management felt the need to offer a scrip alternative so soon after re-iterating its intention to grow dividends by about 5% each year until 2013 sends a different message. “I think the positive that was sent at full-year results has been a little bit mitigated by the scrip dividend,” said Saint Germain. While the dilutive nature of a share dividend will always dent the stock price, the discount pricing of the new shares will also encourage some natural flow-back. “Obviously investors are making the arbitrage and monetising the discount by selling the shares, so that’s weighing a bit on the share price,” according to Saint Germain. He believes that while it may not be feasible for Veolia to return to paying an all-cash dividend next year, the market will certainly welcome such a move when operating cashflows permit it to do so.
“In the case of Veolia, paying the dividend in cash going forward would send a pretty strong message to the market that they have reached a decent level of leverage,” he indicated. With European utilities including GdF Suez, E.ON and RWE undertaking hefty asset disposal programmes in order to reduce their debt loads following acquisition sprees, it is, for the time being at least, more a question of who will be next to submit to the seduction of a scrip dividend.
* The next key signals as far as the French majors are concerned will be provided when they report first-half results on 3rd August (Suez Environnement) and 4th August (Veolia).