Why the share cap op­tion?

Ap­par­ent con­tra­dic­tion ex­plained

Finweek English Edition - - Companies & markets - SHAUN HAR­RIS

SHARE­HOLD­ERS MUST BE de­lighted with the gen­er­ous div­i­dends they’re re­ceiv­ing from short-term in­surer Mu­tual & Fed­eral. In the fi­nan­cial year to end-De­cem­ber 2006 the com­pany paid out a whop­ping R2,66bn in div­i­dends, in­clud­ing a spe­cial div­i­dend of roughly R2bn com­pared with R416m in the pre­vi­ous fi­nan­cial year.

There’s method be­hind this ap­par­ent div­i­dend mad­ness. MD Bruce Camp­bell ex­plains that in light of M&F’s strong cap­i­tal po­si­tion the dis­tri­bu­tions, though they re­duce in­vest­ments, boost share­holder re­turns and re­duce the in­surer’s sol­vency mar­gin to­wards the tar­geted 40%.

Ac­cord­ingly, by year-end share­holder re­turns were marginally up to 27,5% and the sol­vency mar­gin had re­duced from 74% to just over 49%. That takes M&F some way to­wards its aim of bet­ter cap­i­tal ef­fi­ciency.

But then one has to ask: If dis­tribut­ing cash is the ob­jec­tive, why does M&F of­fer share­hold­ers the choice be­tween cash or a cap­i­tal­i­sa­tion award, es­sen­tially new fully paid or­di­nary shares dis­trib­uted in a ra­tio based on the cash value per share? It seems con­tra­dic­tory if the aim is to re­duce cap­i­tal; and while the shares on the cur­rent rat­ing are an at­trac­tive op­tion there will be longer-term share di­lu­tion.

Ini­tially, we sus­pected when cash or shares were of­fered at the in­terim, that it might be a ploy by Old Mu­tual, which holds a hefty 77% or so of M&F, to grad­u­ally build up its stake and qui­etly take over the in­surer. That fol­lowed its clumsy, de­feated at­tempt to take out M&F mi­nori­ties early in 2004. But then Old Mu­tual con­founded us and elected to take cash from M&F. Back to square one.

The an­swer is ap­par­ently very sim­ple. M&F’s Brian Laird-Smith says the share op­tion was in­tro­duced specif­i­cally in terms of the com­pany’s em­pow­er­ment scheme to al­low black part­ners to take shares in­stead of cash. “If the em­pow­er­ment part­ners took cash it could be con­strued as a con­tra­ven­tion of Sec­tion 38 of the Com­pa­nies Act,” he says.

That sec­tion deals with com­pa­nies pro­vid­ing as­sis­tance to buy shares. How­ever, the Act is up for re­view and Sec­tion 38 could change.

Mean­while, it seems as if M&F has no op­tion but to pro­vide a choice be­tween shares and cash in its dis­tri­bu­tions. It also means the div­i­dend pol­icy won’t nec­es­sar­ily re­main so gen­er­ous – there could be fu­ture volatil­ity in div­i­dend pay­ments.

Chris Naidoo, in­sur­ance an­a­lyst and port­fo­lio man­ager at Metropoli­tan As­set Man­age­ment, points out that should there be a sharp down­turn in fi­nan­cial mar­kets it would af­fect in­sur­ers’ sol­vency mar­gins and in­vest­ment in­come. Div­i­dends may well have to be cut should that hap­pen in the fu­ture.

In­dulging share­hold­ers with cash and shares. Bruce Camp­bell

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