Sasol’s progressive dividend policy falls victim to oil price

Market response unequivocal as group says it needs to conserve cash over next 30 months

CAPE TOWN — Sasol shares tanked yesterday as the company, after a special board meeting, dropped its progressive dividend policy in response to lower crude oil prices.

The market was rattled, with Sasol diving close to 11% in intraday trade, although the share recovered to close 5.95% down at R444.97.

This was despite most market watchers agreeing the possibility of Sasol staunching dividend flows had always been on the cards.

Sasol will now move back to a former policy of having dividends covered by earnings.

This is not good news for widows and orphans who have come to rely on sustained dividend flows from Sasol — even through tough trading conditions.

The lower oil price almost certainly means Sasol will report lower earnings this year, which will then — based on the re-adopted dividend policy — mean lower payouts.

Sasol’s progressive dividend policy was based on sustainable longterm earnings — meaning dividend decisions would be based on an intention to maintain and grow dividends over time in line with expected sustainable growth in earnings and taking into account significant economic factors.

By reverting to the old dividend policy, the prospect of a maintained distribution this financial year fades as the lower oil price is likely to see Sasol deliver lower earnings in the year to end-June 2015.

Sasol did not specify a dividend cover range but indicated the revised policy would be based on a range similar to those applied during the 2008 to 2014 financial years.

Mohamed Kharva, an analyst at Nedbank Capital Securities, said the average dividend cover for Sasol for the past five years ranged between 2.3 times to three times depending on whether it was measured against earnings or headline earnings.

While noting that the progressive dividend policy provided a very large underpin to the share price, Mr Kharva stressed Sasol’s dividend change was prudent considering its large capital expenditure programme and the possibility of a more challenging oil price environment.

Sasol is going ahead with an $8.1bn ethane cracker plant in the US but has deferred a final decision on its $11bn-$14bn gas-to-liquid plant in that country.

Sasol said the dividend policy change formed part of the company’s response to the lower oil price — specifically the need to conserve cash over the next 30 months. In the year to end-June 2014 Sasol paid a dividend of R21.50 per share.

DIVERSIFIED global oil and chemical company Sasol has recovered just more than 9% so far this year after falling 36% last year on plummeting oil prices. The support for the share has been based mainly on perceived undervalue. But yesterday it tumbled again, wiping out investors’ gains so far this year. Buyers clearly rushed into Sasol too early.

The proof in the pudding was always going to be Sasol’s interim results, set to be released on March 9. Earnings forecasts have been downgraded to an essentially flat performance for the first half. The question remains how dividends will be affected if earnings shrink.

Investors received their answer yesterday in Sasol’s announcement that it is revising its dividend policy. Not giving too much away, the group intimated that revised dividend payouts would be in the range of those between 2008 and 2014.

The former was a bad year for Sasol, with oil prices dropping to below $40 a barrel and causing Sasol’s earnings to fall 50%. The possibility of a repeat in the March results sent shivers through the market, with the share price dropping more than 10% at one stage.

Investors always react negatively to dividend cuts. Witness Anglo American a few years ago, when it suspended its dividend payout altogether. The wise thing would be to keep dividends stable or at least unchanged, as a much wiser Anglo announced last week in its annual results for 2014.

EMIRA Property Fund has been listed for a decade, and CEO James Templeton’s strategy is finally gaining momentum. The fund has recorded 9% distribution growth for the six months to December.

This beat market expectations of 8.5% distribution growth.

Considering that Emira had some tough years post-recession, in which it tried to get rid of dud assets such as the World Wear Shopping Centre, it is refreshing to see the fund back on track.

Templeton joined the fund in 2004, having been an equities analyst at Barnard Jacobs Mellet Securities for seven years before that. He took on the role of CEO of Strategic Real Estate Managers, which manages Emira’s assets, and eventually became CEO of the overall fund. A key part of his strategy has been to cut vacancies significantly since 2010.

The fund’s portfolio vacancies were 11.4% at the end of December 2010, 11.3% at the end of 2011, 7.8% at the end of 2012, 5.1% at the end of 2013 and 4.9% at the end of last year. Considering the average property owner’s portfolio vacancy was 11.1% at the end of last year, according to the South African Property Owners Association, the gears are clicking at Emira.

The fund’s unit price has risen 42% since February 18 last year.