As businesses hunker down for a prolonged economic standstill, boards of directors in some SA companies have considered it prudent to close dividend taps and build cash buffers to withstand the Covid-19-induced downturn.
It’s annoying to shareholders. But it would be difficult to make a case for payments if it means your company will not be able to come out on the other side of the pandemic that has triggered a fight for survival even among global industry stalwarts.
Capitec, the mass market lender in the middle transforming into a fully fledged lender with a suite of products ranging from insurance, credit cards to business bank offering, this week said it would scrap 2020 dividend payments.
It joins other companies, especially in the property industry, that have delayed or skipped shareholder rewards. But Capitec’s decision was not linked to a scramble for cash, as is the case with most other companies. It has plenty, about R42bn at the end of February.
The Stellenbosch-based company was heeding a nonbinding request from the Reserve Bank’s supervision unit, which has enlisted the sector in its efforts to provide a soft landing for consumers and businesses taking the many hits from the government lockdown to contain the spread Covid-19.
The Bank’s Prudential Authority, headed by deputy governor Kuben Naidoo, “strongly” advised banks to put dividends on hold as part of the central bank’s broader strategy to keep credit flowing and absorb defaults in an economy headed for one of its deepest recessions.
In recent weeks, Naidoo and his team said they would give lenders a break for dipping into their regulatory capital buffers, freeing up as much as R320bn in new lending, and would be flexible on how banks account for clients who have taken up a range of debt-relief and payment holidays.
That Capitec, the smallest bank by assets, is the only one that forced its shareholders to share the pain poses the question: where are the bigger rivals? Well, FirstRand, the biggest by market value, had already paid its 2020 dividend when the nonbinding recommendation was issued.
Standard Bank, Absa and Nedbank were left with no choice but to press ahead with the combined R17.4bn in payments, they said last week, because they had already declared dividends; in other words, made legally binding commitments to distribute a portion of their profits to their investors. Maybe the law is different here, but it is interesting to note that UK banks dropped already declared plans to pay dividends after talks with the Bank of England.
Any attempt to back out of those commitments risked legal action by one disgruntled shareholder, legal experts say. Chances are banks would have lost the case and been forced to pay so they separately decided there were no workarounds on their already declared dividends.
To be fair, the three banks have said they would take the central bank’s recommendation into account next time. Still, one can argue that they could have delayed the payments by a few months. It’s not as if the money will flow directly to those hit hardest by Covid-19 as major investors in the banks are big institutional shareholders such as the Public Investment Corporation, a R2-trillion manger of public servants' pensions. Ninety One Asset Management and Coronation Fund Managers.
Unlike pensioners, who tend to rely on discretionary but largely reliable shareholder payouts to meet their obligations, these investors can surely withstand a few months of dividend drought. It’s hard to imagine a deep-pocketed institutional investor risking a damaging PR disaster with a lawsuit in the middle of SA’s battle fight to limit the economic impact of Covid-19.
Capitec shareholders, the biggest of whom is investment heavyweight PSG Group, might consider themselves unlucky. Or they might feel gratified at being unlikely heroes in the central bank’s efforts to ensure banks play a central role in SA’s efforts to contain the economic fallout of the virus.
And for a fast-growing company like Capitec, the dry spell will most likely be short-lived.
• Motsoeneng is deputy editor.
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