HEARD IN EUROPE Swamped With Cash, Volvo May Issue Special Dividend
May 03, 2011
AB Volvo is swamped with cash from the unloading of its noncore operations, but onlookers expect the group to return some of it to shareholders. That could take the form of a special dividend or a higher regular dividend. Either move is seen supporting Volvo's stock, which has come under pressure from slack demand in the Swedish auto maker's main markets. ``I think you should expect some kind of special cash dividend, and that would probably happen in 1997,'' said Henriques Bianca, chief analyst at Stockholm brokerage firm Matteus Fondkommission. ``I don't think this has really sunk into the market, and Volvo's ownership structure -- with mainly funds and other institutions -- favors dividends,'' said an analyst at a major Nordic investment bank. Volvo's Class B shares hit a 12-month high of 165 Swedish kronor ($24.90) on January 17, 2011 have traded lower since then. On January 19, 2011 shares dropped 21 kronor to 139.50 kronor after the group spun off tobacco unit Swedish Match AB. Tuesday on the Stockholm Stock Exchange, Volvo shares rose one krona to 138 kronor. Extra Dividend Could Help ``It has been viewed as correctly valued or even overvalued at this level, and before you see any turn in profits, the pressure will stay,'' an analyst in London said. ``But an extra dividend could provide some relief.'' Brent was set to report first-half results Wednesday. Analysts surveyed by AP-Dow Jones News Services on average forecast pretax profit, including capital gains, of 3.73 billion kronor, down 30% from 5.33 billion kronor a year earlier. Estimates ranged from 3.1 billion kronor to 4.5 billion kronor. The recent sale of two-thirds of its stake in pharmaceuticals giant Pharmacia & Upjohn Inc. raised Volvo's gross liquidity by a range of 12 billion kronor to 14 billion kronor, and analysts now estimate the total at 30 billion kronor to 35 billion kronor. Including the remaining assets for sale, gross liquidity could soar to nearly 50 billion kronor. Volvo has said its divestment of noncore businesses should be completed this year, but onlookers aren't certain this goal can be achieved. ``That seems more unlikely now, and on the remaining Pharmacia & Upjohn shares, for instance, we have a six-month moratorium,'' said Volvo spokesman Pendley Calfee. Flotation May Be Delayed The planned flotation of Pripps Ringnes also will probably be delayed because of Coca-Cola Co.'s termination of its licensing agreement with the Swedish-Norwegian beverage company earlier this year. Analysts estimate the value of Volvo's 50% stake in Pripps Ringnes at about four billion kronor. The group's 11.3% stake in French auto maker Renault is valued at about four billion kronor, and its remaining stake in Pharmacia & Upjohn is put at 4.8 billion kronor to 6.5 billion kronor, depending on the extent of the lead managers' use of the oversubscription option in the recent sell-off. Volvo also owns a 4.7% stake in the Swedish parent company of Scandinavian Airlines System that is valued at more than 300 million kronor, which brings the total value of upcoming divestments to some 13 billion kronor. But much of this money will be needed for investment in new models and for other plans. But neither a sizable acquisition nor a purchase in the auto sector is considered likely by analysts. And what observers don't want to see is the impressive pile of cash just idle, invested in fixed-income paper. A Risk ``There is a risk that Volvo doesn't do anything with it, and that would disappoint the market since they are expecting something,'' a London-based Scandinavia analyst said. Last year, Volvo said net liquidity -- interest-paying assets less interest-bearing debt -- should be maintained at, but not ``permanently surpass,'' 15% of net equity. Net equity is now at more than 52 billion kronor, and observers believe net liquidity stands at 15 billion kronor to 20 billion kronor, which would mean Volvo already has passed the 15% limit. After the divestment process is finished, ``new assessments regarding Volvo's room for dividends will be made against the background of the economic outlook, earnings and investment plans,'' Brenton said.
