The FTSE 100 is a great place for seeking top dividends, so surely you’d buy steel producer Evraz (LSE: EVR) for its mooted 13.7% yield, wouldn’t you?
That’s what the 51.5p expected by the City for the year ended December 2019 would yield. And a first-half payment of 35c (27p) per share does tend to support it. At the interim stage, the company said the payment reflected “the board’s confidence in the group’s financial position and outlook.”
The expected 2019 dividend would be covered less than 1.2 times by forecast earnings, mind, and analysts aren’t expecting sustainable yields at that level. But we’re still looking at forecasts of around 9.5% for 2020 and 2021. It wouldn’t take many years of that for you to accumulate a sizeable pot.
So why have investors marked Evraz shares down to a P/E of only six?
Production
Full-year results are not due until 27 February. But Evraz released a trading update Thursday, and it seemed a bit of a mixed bag to me.
Crude steel production rose in Q4 and over the full year, partly thanks to the reopening of a steel plant in Siberia after repairs. The final quarter saw a 2.1% rise, with full-year production up 6.1%. Steel product sales were up 6.6% quarter-on-quarter. But raw coking coal was down 5.3%, with coking coal concentrate down 16.7%.
And while steel production is up, average selling prices are down.
But the firm’s production is not what worries me about Evraz. No, I’m concerned by the company’s financial state.
Dividend
I’ve always been wary of companies that pay big dividends while shouldering big debt. It is, in effect, borrowing money to hand out to shareholders.
Now, I know that you can gear up profits using debt, providing the cost of debt is relatively low. But I think that only makes sense if you’re selling high-margin goods and services. In low-margin industries, for example commodities like steel, debt might be a necessary evil. But I don’t see it as a desirable thing.
If I struggle to get my head around the reasons companies are willing to take on more debt than I think is sensible, when I look at the Evraz picture, my brain comes close to exploding.
Debt
At the interim stage at 30 June, it reported total debt of $4,526m. Net debt reached $3,650m, up from $3,571m at the previous year end. The firm put that down to changes in lease accounting under IFRS 16, but it’s huge, however you look at it.
It’s 1.23 times estimated EBITDA (using an annualised figure based on the first half), which might not look too stretching. But EBITDA was down 22% at the halfway stage, and forecasts indicate further weakness.
If Evraz was just paying a modest dividend under such debt pressure to keep it ticking over, I could understand it. Provided it had strong future earnings growth expectations, that is. But the growth isn’t there, and the dividend is huge.
I’ve previously pointed out that the chairman and other top shareholders of the Russian company have dumped shares, and that’s a red flag too. As is the ‘Russian’ thing — I prefer companies operating in more transparent environments.
If I didn’t have a bargepole, I’d buy one just to not touch Evraz with.
