Southern Water - Dividend Ban

[monabri]

https://www.telegraph.co.uk/business/20 ... inflation/

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.
The utility company said its net financing costs have increased by more than 40pc to £278.6m in the year to April 1, mainly as a result of rising payments to service its huge debts."

https://www.bloomberg.com/news/articles ... costs-soar

[88V8]

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.
The utility company said its net financing costs have increased by more than 40pc to £278.6m in the year to April 1, mainly as a result of rising payments to service its huge debts."

Utilities... increasingly a case of PINO... Privatised In Name Only.

V8

[Lootman]

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.
The utility company said its net financing costs have increased by more than 40pc to £278.6m in the year to April 1, mainly as a result of rising payments to service its huge debts."

Utilities... increasingly a case of PINO... Privatised In Name Only.

I have not owned a UK utility in over a decade. Too much political meddling.

Same goes for any UK sector where Labour screeches about a windfall tax e.g. energy and banks.

I do hold a couple of US utilities. There is some government interference there as well, although it is generally less ideological and envy-focused than here. Both are big in renewables: NextEra (NEE) and AES (AES).

[Dod101]

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.
The utility company said its net financing costs have increased by more than 40pc to £278.6m in the year to April 1, mainly as a result of rising payments to service its huge debts."

Utilities... increasingly a case of PINO... Privatised In Name Only.

V8

Water companies may be utilities but they supply the most vital commodity and thus are going to be regulated and so they should be. Better late than never but I am glad that the regulator has told them they must not pay dividends. Better that than have them go bust. Better for shareholders, better for the Government and above all better for consumers. The trouble is that the money that was to be paid in dividends is going to service the huge debt in the company not to improve their services.

Dod

[UncleEbenezer]

https://www.telegraph.co.uk/business/2023/07/07/ftse-100-markets-live-news-halifax-house-price-inflation/

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.

Could be a bit of a downward spiral there? Knock the share price for six and squash the market for shares, and you make it difficult if not impossible for the company to raise money.

If the debt is a problem, haven't they just killed off potential solutions like a Rights Issue (or at least made it vastly harder)? And, by extension, hit the whole sector with severe political uncertainty?

[Dod101]

https://www.telegraph.co.uk/business/2023/07/07/ftse-100-markets-live-news-halifax-house-price-inflation/

"Southern Water has been prevented from paying a dividend until at least 2025 as its inflation-linked debt repayments balloon.

Could be a bit of a downward spiral there? Knock the share price for six and squash the market for shares, and you make it difficult if not impossible for the company to raise money.

If the debt is a problem, haven't they just killed off potential solutions like a Rights Issue (or at least made it vastly harder)? And, by extension, hit the whole sector with severe political uncertainty?

Things are not quite what they seem. In the Annual Report 2022/23, the CFO tells us that shareholders have not been paid a dividend for the last six years 'as we prioritise critical investment' In that time they have raised additional capital from shareholders and incidentally the latest accounts show an operating loss of £18.4 million.

So the ban on paying dividends is merely symbolic. The company has not been paying dividends any anyway.

Dod

[SPURLEY]

To me all the media thrive on doom and gloom especially gloom . The world has changed a lot for the worse partly because of it .

[servodude]

Could be a bit of a downward spiral there? Knock the share price for six and squash the market for shares, and you make it difficult if not impossible for the company to raise money.

If the debt is a problem, haven't they just killed off potential solutions like a Rights Issue (or at least made it vastly harder)? And, by extension, hit the whole sector with severe political uncertainty?

Things are not quite what they seem. In the Annual Report 2022/23, the CFO tells us that shareholders have not been paid a dividend for the last six years 'as we prioritise critical investment' In that time they have raised additional capital from shareholders and incidentally the latest accounts show an operating loss of £18.4 million.

So the ban on paying dividends is merely symbolic. The company has not been paying dividends any anyway.

Dod

Yeah. But with the current focus/fallout from Thames Water and Macquarie presently having a majority stake in Southern Water it's utterly understandable.
Disclaimer: I hold MQG in my SMSF.

[mc2fool]

Things are not quite what they seem. In the Annual Report 2022/23, the CFO tells us that shareholders have not been paid a dividend for the last six years 'as we prioritise critical investment' In that time they have raised additional capital from shareholders and incidentally the latest accounts show an operating loss of £18.4 million.

So the ban on paying dividends is merely symbolic. The company has not been paying dividends any anyway.

And things are not quite what seems to be assumed either. The "ban" on dividends isn't due to some capricious Ofwat or government bit of political meddling but because the recent Fitch credit downgrading was a "Trigger Event" under their debt covenants.

Annual Report 2022/23; pp 103 (CFO's review),113 (Debt covenant), pp205-6 (Directors' report: Going concern) or just search through for "Trigger Event" and "covenant" (lots of each).

[Dod101]

Things are not quite what they seem. In the Annual Report 2022/23, the CFO tells us that shareholders have not been paid a dividend for the last six years 'as we prioritise critical investment' In that time they have raised additional capital from shareholders and incidentally the latest accounts show an operating loss of £18.4 million.

So the ban on paying dividends is merely symbolic. The company has not been paying dividends any anyway.

And things are not quite what seems to be assumed either. The "ban" on dividends isn't due to some capricious Ofwat or government bit of political meddling but because the recent Fitch credit downgrading was a "Trigger Event" under their debt covenants.

Annual Report 2022/23; pp 103 (CFO's review),113 (Debt covenant), pp205-6 (Directors' report: Going concern) or just search through for "Trigger Event" and "covenant" (lots of each).

Yes I did not mention that but it is all set out in the Annual Report. Pity people do not read these.

Dod

[Alaric]

The "ban" on dividends isn't due to some capricious Ofwat or government bit of political meddling but because the recent Fitch credit downgrading was a "Trigger Event" under their debt covenant.

Southern Water isn't a quoted company, so the ban on dividends mostly affects the majority holder. They are Macquarie Asset Management who had form with Thames Water of stripping financial resources and running up debt by way of enhanced dividends.

[Dod101]

The "ban" on dividends isn't due to some capricious Ofwat or government bit of political meddling but because the recent Fitch credit downgrading was a "Trigger Event" under their debt covenant.

Southern Water isn't a quoted company, so the ban on dividends mostly affects the majority holder. They are Macquarie Asset Management who had form with Thames Water of stripping financial resources and running up debt by way of enhanced dividends.

And that I think is the point. I am sure quoted water companies continue to pay dividends just because if they stopped there would be a public outcry or at least a shareholders outcry.

Dod

[mc2fool]

Southern Water isn't a quoted company, so the ban on dividends mostly affects the majority holder. They are Macquarie Asset Management who had form with Thames Water of stripping financial resources and running up debt by way of enhanced dividends.

And that I think is the point. I am sure quoted water companies continue to pay dividends just because if they stopped there would be a public outcry or at least a shareholders outcry.

I'm not sure that's the case. AIUI most companies, quoted or not, have covenants around loans, and I don't know how common dividend paying restrictions are in those but I'd have thought that any lender would want to put in conditions that if certain ratios (or credit ratings) aren't met, such that the company starts to look dodgy, then the company should stop giving money away. I would.

[Gerry557]

I didn't think it was the regulator's demanding stoppage of the dividend but the method of finance.

I think they were also encouraged to have inflation linked debt. A step of the many issues affecting the water industry in general.

I think it a combination of many things that individually they might have coped with but it's happening all at the same time.

Power costs have risen sharply
Debt interest has risen sharply
The need to invest has risen sharply.
The regulator limits both profit and investment.
The regulator's wanted lower bills
Bad management?

The investments had to be agreed with the regulator's and with most things they might have gone for the low hanging fruit. Why risk expensive investment if there is not much chance of getting a return and even if they do the upside is limited.

I haven't followed this closely so I don't know if management just played the hand of cards they were delt or were actually poor, negligent etc with that hand. Was it a bad one to begin with?

Then again they wasted all that money giving to fat cat investors

I have held Pennon for my sins. This was often seen as a good water company and was fast tracked by the regulator's with it's proposals. Now I wanted a return for my investment as did the management. Debt was seen as leverage to improve things as the investments offered a higher return than the cost of debt.

There was a down turn during the last investment cycle and I expect there will be pressure to curtail things even more whilst keeping bills down and investing more.

Something will have to give.

[Dod101]

And that I think is the point. I am sure quoted water companies continue to pay dividends just because if they stopped there would be a public outcry or at least a shareholders outcry.

I'm not sure that's the case. AIUI most companies, quoted or not, have covenants around loans, and I don't know how common dividend paying restrictions are in those but I'd have thought that any lender would want to put in conditions that if certain ratios (or credit ratings) aren't met, such that the company starts to look dodgy, then the company should stop giving money away. I would.

I am not arguing that point and I would imagine that there may be. I am thinking of Directors taking a voluntary stance to stop or at least reduce dividends independently in the name of prudence. They are in a bit of a bind of course because if they did so the share price would presumably collapse, making it more difficult to raise funds via a Rights Issue. SSE has managed to reduce their dividend without any problem though.

Gerry above has mentioned Pennon. Their commitment to increase their dividend year on year at CPIH + 2% is surely unsustainable, both from the point of view of their finances and surely to the regulator as well.

Dod

[mc2fool]

I am thinking of Directors taking a voluntary stance to stop or at least reduce dividends independently in the name of prudence. They are in a bit of a bind of course because if they did so the share price would presumably collapse, making it more difficult to raise funds via a Rights Issue. SSE has managed to reduce their dividend without any problem though.

Not necessarily, it would depend on whether the market thought keeping more money within the business (along with what the directors are likely to do with it) is a good idea or not. I didn't follow the SSE reduction but presumably Mr Market figured that SSE retaining those funds would benefit the business overall. After all, one way to make the share price collapse would be for a failing business to continue to give itself away...

[Dod101]

I am thinking of Directors taking a voluntary stance to stop or at least reduce dividends independently in the name of prudence. They are in a bit of a bind of course because if they did so the share price would presumably collapse, making it more difficult to raise funds via a Rights Issue. SSE has managed to reduce their dividend without any problem though.

Not necessarily, it would depend on whether the market thought keeping more money within the business (along with what the directors are likely to do with it) is a good idea or not. I didn't follow the SSE reduction but presumably Mr Market figured that SSE retaining those funds would benefit the business overall. After all, one way to make the share price collapse would be for a failing business to continue to give itself away...

I have nothing further to say about this particular case but a company paying a dividend is not 'giving itself away'. That is an entirely erroneous concept. A shareholder in a company invests in the hope/expectation of a return on that investment otherwise they would not commit money to it. The most certain way of getting a return is to share in the profit of the enterprise. That is what a dividend is. It is a not a gift, or the company 'giving itself away'. A secondary source of a return is a gain in the capital worth of the enterprise. For an investor to convert that gain into cash it needs them to be able to find a buyer and the stockmarket is, nowadays, a recognised way of doing that.

We are some way now from Southern Water though and will be accused correctly of being off topic so I will leave it there.

Dod

[mc2fool]

Not necessarily, it would depend on whether the market thought keeping more money within the business (along with what the directors are likely to do with it) is a good idea or not. I didn't follow the SSE reduction but presumably Mr Market figured that SSE retaining those funds would benefit the business overall. After all, one way to make the share price collapse would be for a failing business to continue to give itself away...

I have nothing further to say about this particular case but a company paying a dividend is not 'giving itself away'. That is an entirely erroneous concept. A shareholder in a company invests in the hope/expectation of a return on that investment otherwise they would not commit money to it. The most certain way of getting a return is to share in the profit of the enterprise. That is what a dividend is. It is a not a gift, or the company 'giving itself away'. A secondary source of a return is a gain in the capital worth of the enterprise. For an investor to convert that gain into cash it needs them to be able to find a buyer and the stockmarket is, nowadays, a recognised way of doing that.

I think we all know that, Dod. I was referring to companies acting in an unsustainable fashion in regards to dividends, not the general case. If a failing business continues to give out dividends to the detriment of its ability to make future profits then it is, in effect, giving itself away.