Behind the financial results: the challenge of the pay out policy to shareholders


As we are informed in late October of the financial results for the third quarter of 2019 of the automotive groups, a rather difficult year 2019 is looming for most manufacturers and everything suggests that things will not improve in 2020: a large majority of markets are on a downward trend and it is imperative to continue investing.
Investing for a carmaker means both feeding the "business as usual" by regularly renewing the products. It also means, of course, launching or developing in new fields by setting up in countries where it was not present, or not enough, by creating new brands or by developing R&D skills that were not its own until then.
In all these cases, there is a need to spend now and, in most cases, several years in a row, expecting future revenues that may or may not become a reality.
In the case of brand development - PSA knows something about it - it takes a lot of money to install it, and you have to lose a lot of money over several years to hope to earn some. In the case of the "new automobile countries", the cases of Russia, India, Argentina, Brazil, Turkey, Algeria and now China also show that, even when you have succeeded for a while, you have to be very consistent to stay there and be able to take advantage of the high economic conditions that willingly alternate with the more (or even much more) difficult ones.
In this respect, making a big move rather than deserting may be considered as an investment even if, from a purely accounting point of view, this will not translate into expenses but into a decrease in the result or margin.
If we recognize both the difficulty of achieving the same good financial results as in previous years and the urgent need to invest in "business as usual" and to develop, then the question of manufacturers' financial policy and, in particular, the payouts.
From an industrial or commercial point of view, logic would suggest - and the interest of stakeholders, factories or concessions, would be - that it is the shareholders who would be the first to suffer from the difficulties.
That is, in theory, the risk they take when they buy a company share and that is why, when the results are there, they are remunerated. Conversely, when the company has to face a difficult economic situation, they receive less or no dividends and may have to face a drop in prices.
In some shareholder configurations, this is the way it works because the company and its managers benefit from "patient capital".
In other cases, because capital is much more scattered and because very "active" shareholders are putting pressure on it, the shareholders do not hear it at all from this ear and will require both drastic "savings plans" that will inevitably involve investment and a pay outs in the form of dividends and/or share buybacks to somehow offset the negative effect that the announcement of declining results will have had on the share price.
When we compile the data - public for listed companies - it is clear that, in a decade, the second configuration tends to dominate the first: what was only true in the United States between 1996 and 2007, with the known effects, extended after the crisis to the whole industry, with a few notable exceptions, of which VW is the most significant.
Manufacturers distribute a larger share of their net income to shareholders.
While this is important, it does not put a significant burden on their investment capacity. If the latter is less so, the investment suffers.
More importantly, in 2019-2020, the attitude of automakers towards their shareholders when results are down is increasingly to preserve their pay out policy.
To give an emblematic example, Hyundai-Kia, which until then had a very wise distribution policy since the company paid out between 6 and 14% of its net income in dividends and share buybacks between 2010 and 2014, began, in 2015, to pay more than twice as much dividends at the same time as each year (except in 2017) were implemented major share buyback programs.
The distribution rate had thus increased from 9% to 25% between 2014 and 2016. From 2017, despite a turnover that continued to grow, the result deteriorated significantly, mainly because of China and, as the distribution policy was maintained, 105% of the net income was paid to shareholders in 2018. In terms of "capital expenditure", distribution to shareholders represented 6.9% in 2009 and 49% in 2018.
Ford, which has followed the same net income trajectory since 2017, has had the same reaction - or rather the same "no reaction" - and will achieve a 104% net income distribution rate this year.
It is obviously this type of behaviour that, at the end of the financial year, it is essential for automakers to be able to avoid when shareholder pressure - or even attacks by hedge funds - will be strong. From this point of view, the two French carmakers have neither the same history nor the same constraints in 2019.
Between 1998 and 2008, PSA was led, in line with the Peugeot family's asset strategy, to pursue a very generous pay out policy. The Peugeot family used the dividends paid by the group to invest elsewhere.
Since, at the same time, they wanted to regain the share in the capital they had before Jacques Calvet (Peugeot's CEO in the late 1980s) carried out the major capital increases of 1985 and 1987 to restore the company, they had major share buybacks carried out which, once cancelled, mechanically increased their share without having to pay anything.
In 2008, while the result was negative, the amount of dividends paid remained the same and a (small) share buyback program was even implemented.
The group's hardships mean that nothing has been payed out to shareholders until 2017. Since 2017, the distribution rate has fluctuated between 18% and 29%, while capital and R&D expenditure has remained below industry standards (around 3.5% compared with 5.1% and 4.8% at Renault in 2018, for example).
It is therefore to be hoped that the improvement in results will first be used to strengthen these expenses: a lower distribution rate would be a good sign from this point of view.
At Renault, it's a little bit the other way around. The 1998-2008 decade was marked by a fairly limited pay out policy (below 20% on average), which increased fairly rapidly before the crisis.
After the crisis, the Ghosn years will see a fairly sharp increase: net income rises from 4.5% of turnover in 2012 to 9% in 2017, dividend payments double and share buybacks consume between 1% and 4.4% of the net profit.
The 2018 payout ratio was 32.3%. In 2019, it would be 44% if the decrease in net income does not result in an adjustment of the dividends paid. 
Shareholders and, the first of them, the State, would be well advised at the end of 2019 to give signs of its "patience": the State claimed double voting rights in 2015, arguing that its permanent presence in the capital makes it a shareholder different from others who cares about the company's development and its ability to face, in the long term, the challenges ahead.
Despite declining results, Renault needs to continue to invest and capitalize on its presence outside Europe despite the difficulties encountered in a number of markets. Clotilde Debos said during the "profit warning" that caused analysts so much concern for the dividend, that there would be choices to do - what we can imagine.
It will be appropriate when these will be clarified to verify that they are for the company and not to preserve, against all odds, as is too often the trend in this industry nowadays, the pay out policy.
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Translated with, corrections by Géry Deffontaines

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