This week RSA Insurance (LON:RSA) cut its dividend by more than 30%, and the reaction from Mr Market was instant and obvious – shares fell by around 14%, sending shock waves of disbelief out across the investing landscape.
The dividend was cut in order to allow cash to be diverted towards future growth opportunities, most notably in emerging markets. In the words of the CEO,
“In 2012 over 65% of our premiums were from outside the UK and as we move more of the business towards higher growth and higher margin markets, we are optimistic about our future growth prospects.”
On the face of it this seems to be a reasonably sensible position. If cash can be reinvested within the company at a high rate of return then, according to a certain Mr Buffett, that’s where it should go.
Investors don’t like dividend cuts
The problem of course is that this isn’t just any old cash – it’s cash that was expected to be paid as a dividend, which makes many investors feel as if the cash is being taken directly out of their hands, and that’s never a good feeling.
One quote from the FT said the decision was “not good and raises question marks over the chief executive and his judgement”. Another, again from the FT, said that “It’s probably permanently damaged the rating of the shares”.
Elsewhere the response has been largely the same – that it is better to maintain a dividend which results in less future growth, rather than cut the dividend to strengthen the business and improve long-term shareholder returns.
Should the cut have been avoided?
Of course, I’m skipping over an important question which is:
Why hasn’t the company generated enough cash such that it can maintain the dividend and invest sufficiently in future growth, both at the same time?
I guess that on the one hand it does perhaps show a lack of foresight from the company’s management. They should have seen that investment returns would be low (the reason for the lack of cash is cited as being low investment returns due to the low yield investment environment); that there was little spare cash being generated beyond the dividend, and that they had access to a growth market which was ripe for investment.
Perhaps they shouldn’t have raised the…
