Is the financing of dividends through debt responsible? EDF case

At the announcement of EDF's results, the new Chairman-CEO, Jean-Bernard Lévy, seems to be discovering or at least worries about financing the dividend through debt (see Les Echos and Agefi). The same day, ERAFP, a civil servants' pension fund, announces its voting policy and commitment for 2015 focusing on "the implementation of responsible policies regarding the distribution of dividends".

At EDF, the issue of reasonable dividend levels had already been discussed during the 2014 General Meeting: facing the proposal of the Board of Directors of a dividend of €1.25 per share, the employee share ownership fund “Actions EDF” for its part suggested €0.80 per share. In the end, the resolution of the Board offering € 1.25 per share was adopted at 98.4% of the votes against only 2.1% in favor of the second proposal of € 0.80. The state, in desperate need of this dividend because of short-term budgetary constraints, weighed 93% of the votes of the GA, but one wonders why so few of EDF’s minority shareholders questioned this policy of funding dividend through debt.

Proxinvest, in its study, noted:

“It is quite disturbing that cash flow after net investments excluding strategic transactions and net changes in working capital was negative in 2012 (-1.9 billion) and 2013 (-1.1 billion). Despite the Operating Cash Flow, which improved from € 12.3 billion to € 13 billion in 2013, the cash flow after dividends remains negative. Given the significant investment policy envisioned for the coming years and the current level of debt (net debt, including subordinated debt, being higher than equity), it seems best not to finance all or part of the dividend with new debt or new issuance of subordinated securities (remuneration between 4.25% and 6% per year for emissions 2013).

It seems less risky for the future of the group and its shareholders to back the dividend suggested by the employee share ownership fund which, far from negligible, seems better funded and more responsible on the long term. Therefore the proposed distribution of the board is not supported.

The equity investment can finance the economy but remains risky. It is therefore legitimate to pay for it through dividends. However, being a responsible shareholder means remembering that, ultimately, the shareholder is only paid once every other stakeholder was and after every investment is. Debt is not intended to finance dividends, other than creating risks - not necessary - for the survival of businesses.

The EDF example also shows that voting during general meetings is an essential part of the management process. Investors’ financial decisions cannot be reduced to mere decisions of purchases or sales and significant financial decisions are made in a general meeting. It is therefore important that the resources allocated to the analyses of general meetings are sufficient in management companies as among institutional investors.

The 2014 Florange Act intends to reduce the powers of minority shareholders, private, institutional and management companies, offering only to holders of registered shares for at least two years to carry double voting rights hence protecting issuers against public offers. At EDF, it is the main beneficiary of this future double voting right, the state, which requests and supports this dividend funded through debt. Not so responsible and rather short-termist ... This double voting right, resented by foreign investors who feel partially expropriated, will in fact allow the state to sell part of its stake all the while keeping the same level of control.

This is a short-term incentive mechanism for indebted shareholders, which even offers perks for leaving shareholders : nothing to do with long-term investments ...

 

Posted on February 13, 2015 by Proxinvest