Will Vale’s New Dividend Policy Be a Winner?



Vale’s new dividend policy

Vale (VALE) announced a new dividend policy on March 29. The new policy comprises two semi-annual installments. One installment is payable in September, and the other in March. The September installment is to be based on the first half of the year’s results, and the March installment on the second half’s results. The dividends are to comprise a minimum of 3s0% adjusted EBITDA, minus sustaining capital expenditure. Also, the board of directors may approve additional remuneration through the distribution of extraordinary dividends.

This policy is more aggressive and sustainable and could be applied in any price scenario, as it’s linked to cash flow generation.

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High dividend yield

As per the policy, the first-quarter results translate into minimum dividends of $1.03 billion, which should increase by applying a minimum threshold of 30%, as we described above. These dividends should then be payable in September 2018. A similar level of dividends in each quarter would mean ~$4 billion in dividends annually, which translates into a 5.3% dividend yield, given the stock price as of May 21. As per Thomson Reuters consensus, the dividends for 2018 translate into a yield of 4.3%. The dividend yield for the S&P 500 index, meanwhile, is currently 1.89%.

Backed by solid fundamentals

This kind of dividend yield is quite high even given that interest rates are rising. While Vale’s dividends are expected to remain high, it alone can’t make it a promising investment. However, its healthy cash flows and strong balance sheet can. Vale’s healthy cash flows have enabled it to come up with this policy of aggressive dividends. As we’ve discussed previously in this series, after hitting its net debt target of $10 billion, the company is planning to distribute any excess cash to shareholders. Analysts expect it to generate free cash flow of $7.9 billion for 2018, which translates into a whopping free cash flow yield of 10.4%.


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