Duke Royalty plans paper dividend – Duke Royalty has been reviewing the situation with its business in light of COVID-19. It says “Through its diversified portfolio, Duke naturally has exposure to a range of sectors, some of which are impacted to a greater extent by Covid than others, such as hospitality & leisure. In certain situations where Covid-19 has had the greatest impact, Duke has elected to either accrue, capitalise or equitise its monthly cash payments in the short term with the intention of alleviating the negative cashflow impacts for its royalty partners during this time of unprecedented financial stress.”
What this means in practice is that normal monthly cash inflows of around £1m have dropped to about £600,000. Duke is making enough money to cover its overheads – it says “the company’s Q1 2020 cash receipts will likely exceed its entire FY 2021 annual operating cost budget“. It also has £3m of cash on hand and about £18m available through its credit line with Honeycomb Investment Trust.
All in all then it reckons that “While it is too early to make any definite forecasts, Duke remains cautiously optimistic that its royalty partners will be able to successfully navigate through this unique period of uncertainty and Duke looks forward to be able to report on a more normalised trading environment in due course.”
Nevertheless, Duke wants to hang onto the cash that is coming in so that it can make follow-on investments in existing royalty partners over the coming months. For the June quarter it intends to pay a scrip dividend in place of its normal cash dividend. The effect is that shareholders get extra shares on top of those they hold in proportion to their shareholdings (in the old days – more paper! – showing our age, perhaps). Now this works fine if some shareholders are taking the cash and some are electing to have more shares – there is a transfer of value to the ones that don’t take the cash. If everyone gets shares, however, it is just a bonus issue. nobody benefits and it is as though the company suspended its dividend. Getting the extra shares may make you feel better but it doesn’t provide any real benefit – in fact it costs the company (i.e. shareholders) money to go through the rigmarole of paying the scrip dividend.
Pointless exercise though this dividend may be, we think some kudos is due to Duke for finding ways to get its borrowers through this difficult time.