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Norilsk Nickel's Dividend Policy


There are many different theories in the academic world of finance surrounding both the importance of dividends and how shareholders and the general market can react to changes in a company’s dividend policy. There are also different types of dividend policy which will be discussed in this blog. The different theories and policies will be applied to a company I have looked at called Norilsk. I will look at their current dividend policy and their future dividend policy whilst also applying relevant theories and ideas I have been learning on the module International Finance and Responsible Financial Management.

Norilsk Nickel (or Nornickel) is the world’s largest producer of palladium and is also one of the largest suppliers of nickel (Financial Times, 2019). Palladium is useful in the modern world as it is used in vehicles such as cars, specifically in the catalytic converter which is used to reduce harmful emissions (Financial Times, 2019). Norilsk's share price has increased by 33% this year as the company continues to grow (Financial Times, 2019). Norilsk have adopted a dividend policy which includes paying a stable constant dividend. Norilsk have paid roughly 17 dividend payments in the last 5 years, demonstrating their commitment to paying leftover capital to shareholders (Yahoo Finance, 2019). Currently, Norilsk’s dividend payments amount to 60% of its EBITDA (Financial Times, 2019), which seems quite a lot if you ask me. Norilsk’s two major shareholders are Vladimir Potanin, who runs the company, and Rusal, an aluminium company, who own 30% and 27.8% respectively (Financial Times, 2019).

Recently, Vladimir Potanin has proposed to investors that dividends should be reduced at some point between 2022 and 2025 so more money can be invested into new projects with dividend payments increasing again once they are up and running (Financial Times, 2019). This news could have an affect on shareholders and the market according to Signalling theory (Connelly, Certo, Ireland & Reutzel, 2011). This could signal to shareholders that the company is expecting a reduction in cash flow and so, in anticipation, they are reducing dividend payments. This could cause the share price to fall as the market reads this signal negatively. Alternatively, shareholders could interpret this proposed change as a positive as it means there will be more investment in positive Net Present Value (NPV) projects. This could result in an increase in share price as shareholders are expecting the company’s value to increase (Connelly et al, 2011). In reference to Norilsk, there actually has not been a market reaction reflected in the share price since the news of the proposed change of dividend policy, implying the theory of signalling is not true. However, there could simply be no change in share price yet because the proposed change is not confirmed yet and if it was, it would not take effect until after 2022. Back in 2008, arguments between Mr Potanin and Deripaska began, causing a huge drop in share price (BBC News, 2010) (Yahoo Finance, 2019). This is an example of how signalling can affect the share price as the market has seen the argument between two major shareholders as a bad sign, causing the share price to drop.

Modigliani and Miller (1961) argued their theory of dividend irrelevance claiming that investors are indifferent between capital gains and dividends. This means investors do not care if they receive money through a cash paid dividend or an increase in share price as they will receive money either way. Modigliani and Miller (1961) therefore suggested companies focus on investing on positive NPV projects in order to increase the value of the company and then any leftover money should be paid in dividends. Modigliani and Miller (1961) also argued that paying dividends does not generate value. If we apply Modigliani and Miller’s (1961) theory of dividend irrelevance to Norilsk, then they should pay lower dividends if there are positive NPV projects available for them to invest in which Vladimir Potanin argued there are (Financial Times, 2019). Opposed to this theory is dividend relevance theory which implies that different dividend policies have an affect on share price (Baker, Powell & Veit, 2002). Dividend relevance theory also suggests that investors would rather have a cash paid dividend as cash in hand now is better than a potential of more cash in the future (Baker, Powell, & Veit, 2002). 

The two major shareholders in Norilsk, Vladimir Potanin and Oleg Deripaska (owner of Rusal) have publicly disagreed over their dividend policy multiple times in the past (Financial Times, 2019) (Financial Times, 2018). Mr Potanin wants to invest more of Norilsk’s cash into growing their business and investing in greener operations which would mean reducing dividend payments. Mr Deripaska however, wants to keep paying a high dividend as he wants to use the dividend payments from Norilsk to help pay off some of Rusal’s debt (Financial Times, 2019). Bøhren, Josefsen and Steen (2012) have said that their can often be a conflict of interest between people who run the company and other shareholders when it comes to dividend policy as both have different aims and objectives.

To summarise, there are many different theories, ideas and concepts surrounding a company’s dividend policy and the reaction the market can have because of it. With regards to Norilsk, it could be argued the market is yet to react to the potential change in dividend policy due to the company only just beginning to discuss possibly changing their dividend policy and a guarantee that nothing will change before 2022, giving investors comfort that there are going to be no immediate changes to dividend policy. Only time will tell how the market receives the change in dividend policy if it does eventually change.

Reference List 

 Baker, H. K., Powell, G. E., & Veit, E. T. (2002). Revisiting the dividend puzzle: Do all of the pieces now fit? Review of Financial Economics, 11(4), 241-261.

BBC News. (2010). Kremlin avoids Norilsk Nickel battle. Retrieved from https://www.bbc.co.uk/news/business-11388714

Bøhren, Ø., Josefsen, M. G., & Steen, P. E. (2012). Stakeholder conflicts and dividend policy. Journal of Banking & Finance, 36(10), 2852-2864.

Connelly, B. L., Certo, S. T., Ireland, R. D., & Reutzel, C. R. (2011). Signaling theory: A review and assessment. Journal of management, 37(1), 39-67.

Financial Times. (2018). Oligarchs step back from ‘shootout’ for control of Norilsk Nickel | Financial Times. Retrieved from https://www.ft.com/content/e6dabae8-3e3b-11e8-b7e0-52972418fec4

Financial Times. (2019). Norilsk flags lower dividends as it ramps up investment | Financial Times. Retrieved from https://www.ft.com/content/44c7d572-09f2-11ea-bb52-34c8d9dc6d84

Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. the Journal of Business, 34(4), 411-433.

Yahoo Finance. (2019). Retrieved from https://uk.finance.yahoo.com/quote/NILSY/history?period1=1091487600&period2=1574899200&interval=1mo&filter=history&frequency=1mo

Comments

  1. Emily Whiteley7 December 2019 at 08:00

    A great blog relating to an appropriate business example! If you were a shareholder, would you agree with M&M that dividends are irrelevant as the value is in the stocks you own, and the potential to sell and make cash that way? Or would you be more inclined to support the bird-in-the-hand theory and rather have those dividends paid to you asap?

    ReplyDelete
    Replies
    1. Lewis Wright17 January 2020 at 07:23

      Personally, I would be more inclined to side with the bird-in-the-hand theory as there is a lot less risk involved with cash paid dividends as opposed to a simple rise in share price. However, I would not disregard the argument of dividend irrelevance as I can see how that would apply to growing companies which choose not to pay a dividend but see a huge growth in share price.

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