RE: RNS 'WITHIN' Next Next 6 (market) Days for First CASH Injection20 Feb 2025 14:10
Manx : In the last 24 months the
regional and global economies
have shown signs of recovery –
despite the recent slump in oil
prices we have seen growth of
97% in the Dubai Financial
Market, 22% in the Tadawul and
the London FTSE recently broke
the 7,000 points barrier for the
first time.
As groups return to profitability,
this often triggers an
expectation from shareholders
to start receiving these profits in
the form of cash dividends.
Often, however, a “dividend
trap” will be a fundamental
barrier that prevents a group
from returning value to its
shareholders.
Firstly what is a “dividend trap”
and what causes it? The recent
financial crisis resulted in
financial pain for many regional
and global investors. Falling
asset values often triggered
accounting impairment of assets
– especially of those assets
acquired at the peak of the
market. Companies ordinarily
need positive retained earnings
in order to pay dividends and
where these impairments
depleted those retained earnings
it forced a number of groups to
suspend dividends payments.
Don’t let dividend traps trip you up
Can’t see the return on your investment? You need to unlock value and release trapped cash
to shareholders, says Blaise Jenner, PwC Middle East Partner in Capital Markets and
Advisory Services
Whilst many of these groups
have recently returned to net
cash and profit generation, the
recent profits are often not
sufficient to fully absorb those
previously accumulated
accounting losses. This scenario
is known as a “dividend trap”
where a group is net cash and
profit generative but cannot
lawfully pay a dividend due to
accumulated accounting losses.
Dividend traps impact a variety
of stakeholders. Firstly it may be
a source of frustration and
confusion for shareholders -
whether individuals, corporates,
family businesses, private equity
investors or governments.
Having waited through the
financial down turn they can
now see positive cash and
profits generation but they
cannot directly access this value.
Depending on their objectives,
this may disrupt the
shareholders ability to redeploy
cash for other opportunities or
requirements.
This scenario will also invariably
place pressure on the group’s
senior management team to
turn profits into cash dividends
and meet expectations of those
shareholders on a timely basis.
Additionally, deal makers may
also have to think twice about
entering a structure where
dividend traps are presenting a
medium to long term barrier to
cash extraction.
C