Page 10 - AMANGO MODEL ANSWER 2

P a ge | 10

Although Modigliani and Miller (MM)’s dividend irrelevancy theory suggests that corporate value
should not be affected by a corporation’s dividend policy, in practice, changes in dividends do matter
for two main reasons:
• First, dividends are used as a signalling device to the markets and unexpected changes in

dividends paid and/or dividend growth rates are not generally viewed positively by them.
Changes in dividends may signal that the company is not doing well and this may affect the
share price negatively –this must have been the concern of the Group CFO and CEO from

inception; and
• Second, corporate dividend policy attracts certain groups of shareholders or clientele. In the
main, this is due to personal tax reasons. For example, higher rate taxpayers may prefer low
dividend pay-outs and lower rate taxpayers may prefer higher dividend pay-outs. A change in

dividends may result in the clientele changing, and this changeover may result in excessive and
possibly negative share price volatility. This cannot be ruled out at AMANGO!

2. Pay-out ratio policy
Clearly, following this policy means we are saying to the markets, that to the extent that earnings will
be volatile with the commodity price cycles, dividends also will be volatile for the shareholders. This

uncertain outcomes could see shareholders shift to other mining companies who have maintained a
constant dividend growth policy (‘reverse’ clientele effect) -as we are by this, sending a signal that
we are not confident about delivering stable earnings going forward. This is precisely what the Board
Chair, in his Strategic Report, means when he states that the ‘purpose of the change is to provide

shareholders with exposure to improvements in commodity prices, while retaining cash flow flexibility
during periods of weaker pricing.’ Well if MM theory holds, this may not be a problem, but there is
ample evidence from sentiments expressed by the Group CEO and CFO that in this industry, capital
moves to companies that follow a stable dividend policy. But again, we cannot ignore the need to

conserve cash during periods of weak commodity price cycles, but, it is our considered view that it is
far better to signal a strong intention to pay and then deal with such eventualities when and if they
arise, rather than clearly articulating a policy that sends a clear signal of risk to the investors! There
are indeed, no easy choices here!

Recommendation: Return to the stable dividend growth policy.

Justification: The main point in managing the dividend, finance and investment policy is how to
adopt the right balance that will grow the share price –this is the point the full board is in agreement
over. Our analysis shows we are currently undervalued by as much as 34% and this stands to be

corrected if we return to the old 6% dividend growth policy. That may also lessen the risk of takeover
from VR as clearly, that will go a long way to close the P/E ratio gap between us. Moreover, pay-out
ratio will add to the risk for the investors and shift capital to other rival mining companies! A return to

the policy shows we can indeed balance our desire to grow, pay dividend and still manage the
Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2017'
www.charterquest.co.za | Email: thecfo@charterquest.co.za