What Enabled Vale to Adopt an Aggressive Dividend Policy


Apr. 10 2018, Updated 7:33 a.m. ET

Reduction in debt to enable dividends

In its 1Q18 results, Vale (VALE) stated that net debt reduction has enabled it to adopt an aggressive dividend policy. Investors should note that Vale reduced its net debt from $25 billion in 2016 to $18.1 billion in 2017. It also received net proceeds of $3.7 billion from the sale of its fertilizer assets in January 2018, and the company was set to receive its Nacala Corridor project financing by March 2018. Considering these two transactions, the company’s pro forma net debt is $14.4 billion.

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The company is targeting net debt of $10 billion. During Vale’s investor day in December 2017, chief financial officer Luciano Siani Pires stated that “the accumulated dividends are the difference between the cash flow generated as of the previous slide and the amount required to lower net debt to $10 billion,” adding that “we’re going to distribute each and every penny beyond what’s required to take that down to $10 billion for you.”

Miners’ capital allocation

As commodity market (COMT) conditions have improved, companies have taken another look at their capital allocation strategies. Only a couple of years back, debt reduction was miners’ sole priority, as commodity prices were hovering near multiyear lows. Now, as prices have bounced back sharply, miners have been exploring other ways to allocate capital, including returning cash to shareholders.

Freeport-McMoRan (FCX) reinstated its dividends in February 2018. The company plans to start paying $0.05 per share in quarterly dividends. Earlier this year, Glencore (GLNCY) announced its dividend policy, under which it would be paying $1 billion in dividends from its marketing arm. The company also intends to pay a minimum of 25% of its industrial free cash flow as dividends. Rio Tinto (RIO), which had a progressive dividend policy before commodity prices crashed in 2015–2016, has now linked its dividend to its underlying earnings. The company intends to pay 40%–60% of its underlying earnings as dividends. Teck Resources (TECK) opted for a supplemental dividend and a share buyback last year to return capital to shareholders.


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