While 2015 was the year of the dividend for the FTSE 100 overall, collapsing commodities prices and emerging markets turbulence caused Anglo American (LSE: AAL), Glencore (LSE: GLEN) and Standard Chartered (LSE: STAN) to cut or suspend dividends. With market conditions still poor for both emerging markets and commodities, will the cash saved from dividend cuts be enough for these three companies to rebound?
Embattled miner Anglo American has been frantically attempting to shore up a shaky balance sheet by suspending dividend payouts for 2016 to save $1bn, cutting 2016 capex by $1bn and targeting an additional $4bn of asset disposals. Further cuts to operating expenditures are predicated on a 55% reduction in assets held and 60% reduction in workforce size over the next three years. These actions remain necessary as the company has $13bn of debt on the balance sheet, $8.4bn of which is due over the next three years. Despite these cuts, management itself forecasts negative cash flow of $1bn in 2016.
Seen in this light, the suspension of dividend payments was a necessary step but it remains to be seen whether these cuts will be enough to turn around Anglo American. Although the company’s access to $15bn in cash and credit lines may keep an analyst-predicted rights issue off the table for the time being, the medium-term outlook for the company remains reliant on a swift and sudden uptick in commodities prices. With little reason to believe demand will return to the levels it did during the commodity super-cycle and miners relying on continued production to stave off creditors, I see little reason to buy debt-ridden Anglo American at this time.
Reducing debt
Glencore’s dividend suspension saved $2.4bn and alongside a $2.5bn rights issue was part of an aggressive plan to trim net debt from $30bn last year to $18bn by the end of 2016. The company’s strong trading arm, which is predicted to generate pre-tax earnings of $2.6bn in 2016, has provided a significant cushion that other commodities producers don’t enjoy. The trading arm’s profits, combined with continued asset sales and capex cuts, are forecast to provide $2bn in free cash flow this year. Taken together, these moves have done much to right the ship for Glencore but even the rosiest assumptions have $18bn in debt remaining. At the end of the day, Glencore share prices remain wedded to commodities prices and with very high debt levels I would steer clear of the shares for some time to come.
Long road ahead
Standard Chartered also undertook a rights issue and cut dividend payments late in 2015 in order to increase capital buffers amidst plunging emerging markets. These measures are unlikely to reverse share price declines as the 2015 full-year results are expected to show earnings per share plummeting by more than 80%. Return-on-equity fell to a dismal 5% last year and further writedowns to non-performing loans in the commodities sector and Asia are forecast. Given the high costs that need to be reined-in, poor outlook in key markets and better options available in the sector, I don’t believe capital raising through dividend cuts and rights issues will be enough to send shares of Standard Chartered rebounding any time soon.