Company and Carroll show it’s more important than a dividend
ANGLO AMERICAN’S PRICE has more than doubled on the London Stock Exchange (LSE) since the beginning of May this year – from 906p to the current 1910p/share. Anglo’s primary listing is on the LSE, which is why its price is given in pence. Due to the exceptionally strong rand – especially against sterling – Anglo’s price on the JSE increased by “only” 84% from R134,20 on 3 March this year to the current R247,70/share.
On 20 February this year Anglo and its CEO, Cynthia Carroll, shocked the investment community by deciding not to declare a final dividend for the year to 31 December 2008. The company had already wisely decided earlier to suspend the buying back of its own shares. There was suddenly a shortage of cash in the company’s coffers and everything had to be done to protect it.
That was a shock for investors in Anglo, who had been able to rely on a generous dividend throughout the Second World War and the darkest days of apartheid. After all, regular and rising dividends were synonymous with quality investments – or so we thought.
The last week of February was a black week for Anglo and Carroll. At 906p/share its price was more than 75% lower than it had been just 18 months earlier. There was speculation the group would have problems rolling over its substantial debt of more than £8bn – not to mention new money that Anglo was so badly in need of. That was after the cash flow from Anglo Platinum, its biggest investment, which had decided earlier to skip its dividend, dried up. Though Carroll’s head was on the block she survived.
The lesson for investors from all this is, first, the darkest night often offers the best investment opportunity. The lesson for CEOs is that in the darkest days you have to focus on cash, more cash, cash flow and cash again. And when you see the first sign of a small light in the tunnel your focus must remain on cash and cash flow. Anglo decided as follows (see graph below).
Along with those steps to improve its cash position, Anglo unfortunately also had to cut back severely on several of its operations and many people lost their jobs. However, the focus was consistently on improving the cash flow and reducing debt, or at least ensuring quality sources of financing were available. The result: a sharp rise in its share price because it ensured it had sufficient cash available and that the cash flow wasn’t negative. That ensured survival and the opportunity to share in the latest, sudden improvement in the prospects for resources.