FOCUS: Swedish Capital Goods Makers Weigh Options For Cash
January 05 2011 - 11:32AM
Dow Jones News
A strong pickup in demand and low interest rates have left
Sweden's capital goods makers so well capitalized that investors
now are trying to figure out which companies are more likely to
distribute surplus cash to shareholders.
Even after meeting their debt obligations and paying ordinary
dividends to shareholders, the country's 18 largest publicly traded
capital goods companies together may be sitting on a cash pile of
100 billion Swedish kronor ($14.76 billion) in 2011, according to a
report compiled by investment bank Carnegie. Capital goods
companies comprise major-appliance makers and those that supply
machinery, tools and equipment used to make other products.
"The sector has never had a net cash position before," Carnegie
said. The strong balance sheets could trigger acquisitions or more
cash for shareholders through one-off dividends or stock buybacks,
it added.
Investors in Sweden's capital goods sector are unaccustomed to
windfalls. There have been only 11 instances of one-off dividends
among these companies in the past 10 years and Carnegie said it is
unlikely that all the surplus cash will be distributed to
shareholders.
Carnegie has identified some companies it believes have
potential to reward shareholders in 2011. It said that extra
dividends are likely from household appliance maker Electrolux
AB(ELUX-B.SK), Swiss-Swedish electrical engineering company ABB
Ltd. (ABB) and defense company Saab AB (SAAB-B.SK).
Electrolux would be able to pay shareholders between SEK15 and
SEK20 per share on top of its regular dividend, equivalent to more
than 20% of its market capitalization.
Saab and would be able to pay SEK19 per share and ABB SEK25,
according to Carnegie.
"Among these players, we believe Electrolux offers the greatest
chance of extra cash distribution," said Carnegie, adding that Saab
and ABB traditionally were more focused on acquisitions and,
therefore, were more likely to hold on to their cash.
Electrolux, Saab and ABB were unable to comment on the
possibility of one-off dividends, and referred to dividend
proposals that will be put forward with the release of their
fourth-quarter results. At 1500 GMT, Electrolux shares traded down
1.8% at SEK186.90. Saab traded up 1.3% at SEK128.30 and ABB traded
down 1.3% at SEK149.
Other well-capitalized companies that Carnegie said could
distribute more cash are Atlas Copco AB (ATCO-A.SK) and Alfa Laval
AB (ALFA.SK), which have significant cash reserves. At its capital
markets day in November last year, Alfa Laval said it wouldn't rule
out share buybacks or extra dividends as the company tried to make
its balance sheet "more efficient." Alfa Laval referred to its
forthcoming dividend proposal in its quarterly result.
Carnegie's view isn't shared by everyone. Niclas Hoglund, equity
analyst at Swedbank, thinks it is still too soon for many companies
to think about paying extra dividends. "Even though the credit
market has improved, I think companies are still worried about the
availability of capital," he said. "The financial crisis is still
fresh in mind."
Hoglund sees some exceptional cases, such as Electrolux, which
has a low level of debt and has indicated that its balance-sheet
strength could be better utilized.
He also pointed to construction giant Skanska AB (SKA-B.SK),
which last week gained SEK5 billion from the sale of its stake in
the Autopista highway in Chile, and to automotive parts maker
Haldex AB (HLDX.SK), which last month divested one of its divisions
to BorgWarner Inc. (BWA) for SEK1.43 billion, saying these
companies are likely to resort to extra cash distribution.
In an earlier interview, analyst Bengt Claesson at SEB Enskilda
said he expects Skanska to distribute about 60% of its gain as an
additional dividend, but Chairman Sverker Martin-Lof told Dow Jones
Newswires that no discussion regarding extra dividends will be
taken before the deal was finalized.
Haldex Chief Executive Joakim Olsson didn't rule out giving the
money from the spinoff to shareholders. "Either we will invest the
money in [the remaining business units] CVS and Hydraulics or
distribute the money to shareholders through dividends. That is for
the board of directors to decide," Olsson said in a previous
interview.
Swedbank's Hoglund added that the cases of Skanska and Haldex
were exceptional, and it likely would be "a couple of years" before
there was a broader trend in one-off dividends.
"In the last business cycle we didn't see any extra cash
dividends until 2006 and 2007," he said.
-By Sven Grundberg, Dow Jones Newswires; +46-8-5451-3098;
sven.grundberg@dowjones.com
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