Dividend payouts could fall as companies report lower profits or have less spare cash as a result of spending on backup power for load-shedding, a situation compounded by the associated loss of profits.
Dividends payouts are a way of returning earnings to shareholders, but as firms retain capital for investment there will be less for investors.
Retailer Pick n Pay issued a profit warning last week when it released a 10-month trading update and explained that it may earn less than expected because of the need to invest in battery and other power solutions because generators were not designed for the lengthy stages of load-shedding that SA is experiencing.
The retailer had already predicted flat earnings for its 2023 financial year as it invests heavily in new store revamps and expansion, but last week it suggested it could earn less than at first predicted because of lower sales and higher costs caused by blackouts .
All Weather Capital analyst Chris Reddy thinks Pick n Pay’s dividend policy may have to change in the short-term to leave cash for power contingencies. He said, however, that Pick n Pay was not an outlier.
The same pressure would be felt by real estate invest trusts (Reits) that must spend huge amounts on office and shopping mall generators or solar or battery energy, leaving less profit for distribution to investors, Reddy said. Also affected are mining houses, he said, with local miners having to invest billions on their own power generation.
Minerals Council SA, an industry organisation, says local mines are investing $10bn in power generation projects to create 10GW that will come online in the next 18 to 48 months.
Companies each have a dividend policy with a particular payout ratio of excess cash. So it stands to reason if profits go down, so will the dividends, says Sasfin analyst David Shapiro.
“I would imagine Pick n Pay will reduce their dividend accordingly. There was a stern warning in the sales update that profits will be down and they won’t meet their original projections.”
But is this a bigger trend in SA?
Last week, Anglo American Platinum (Amplats) CEO Natascha Viljoen told news agency Bloomberg: “Will our investors continue to get their returns? Yes, they will, but the size of returns will be slightly softer.”
Amplats issued record dividends in 2022 as SA mines reported a boon from commodity prices rising by 70% even as export volumes were flat due to logistical constraints. This year mining companies are seeing lower commodity prices and greater expenses or lower mining production due to power outages.
“What is for sure is earnings will be impacted negatively,” Sibanye-Stillwater CEO Neal Froneman said in an interview with Bloomberg last week.
Gryphon Asset Managers analyst Casparus Treurnicht said as SA firms spend more on power generation, there is less money to go around for shareholders. “I think the likes of Shoprite and Pick n Pay have already spent on generators, so that will result in higher operating expenses. This will put pressure on dividends as it means less money left over.”
Business can also not operate when there is no power. This means revenue is also at stake, which puts further pressure on dividends. “It does not matter what way you look at it, this is not good for any business impacted by load-shedding,” Treurnicht said.
Protea Capital Management CEO JP Verster said the effect of power cuts on dividends depends on the type of company. If it competes internationally, like Amplats, then it can’t raise prices to make up for losses due to load-shedding as it competes with platinum producers from Russia, Canada, Zimbabwe and other areas. Companies that don’t have the pricing power and can’t pass on the increased cost of load-shedding will see pressure on profitability and dividends, Verster said.
“A SA mine is at a disadvantage as it is investing more on backup power while international buyers have alternatives.”
SA’s largest chicken producer, Astral, for example, could not raise chicken prices to meet increasing input costs due to power and water shortages as it competes with frozen chicken from abroad, where power supply is predictable.
But there are companies that can pass on costs from power generation over the medium-term, Verster said.
“Anyone in a position to pass on these increased power costs to the consumer can protect their own profitability and their own dividends. This leads to an increase in prices and inflation.”
Retailers are an interesting example, he said. All SA retailers must have backup power to keep the fridges on. They all have similar input costs and can over the medium term raise prices, resulting in an “increase in food prices across the board”.
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