Wholesaler Spar is halving dividend payouts for the next two years to fund its expansion effort in Poland, after banks showed little interest in increasing its debt.
The decision on Wednesday came a day after Business Day reported that Spar chair Graham O’Connor told an annual shareholder meeting that Irish banks had shown a lack of appetite for significantly upping its debt ratio. Spar has R8bn in debt, which is well within its 2.75 times net debt to core profit, or earnings before interest, tax and depreciation, covenant with banks.
The ratio is used by lenders to measure if debtors can meet repayment obligations.
But it needs cash to roll out new SAP software locally and for its expansion plans in Poland, one of Eastern Europe’s fastest-growing economies, where it is opening stores in petrol forecourts.
“The board has determined that it would not be appropriate to expose the group to higher levels of debt and is comfortable with the existing levels of gearing and related risk profile,” it said in a regulatory Sens filing.
Shareholders are not losing out on dividends altogether.
“The board believes that this decision will provide sufficient flexibility for the group to pursue growth initiatives, while continuing to return dividends to shareholders.”
The decision will free up about R1.8bn, said Nedbank analyst Sa’ad Chotia in a note, adding that the decision to keep debt levels stable was “prudent” as the company’s debt was at a 10-year high.
The company rewarded shareholders with a total dividend of R8.16 in 2021. Analysts had estimated the company would pay at least R7.96 in 2022, according to a Bloomberg poll. With the dividend halving, it is likely to be closer to R4 a share.
The change in dividend policy for the next two financial years should not come as a surprise. Spar said in November that a reduction of dividends was being considered.
“The board is investigating various financing alternatives and wishes to advise that this might include an adjustment to the current dividend policy.”
In 2019, Spar bought a Polish wholesaler and distributor out of business rescue, taking on its R1.3bn debt. It initially expected to break even by 2022.
It took over Spar’s licence in Poland in February 2020, allowing it to sell to independent Spar stores. But as the previous Spar wholesaler had collapsed, the stores had already found new suppliers. This meant Spar SA had to win over their business and loyalty, just as the pandemic struck. That left executives who were set to work in Poland stuck in SA.
Spar, however, is one SA retailer that has been particularly successful abroad, owning a wholesaler in Switzerland and Ireland, with 36% of revenue coming from overseas.
The group saw growth of 3.7% in SA stores in the 18 weeks to January 29, less than price inflation, meaning SA consumers actually bought less than the prior period.
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