A Lesson for Qantas From Steve Jobs
Apple co-founder Steve Jobs was famously dismissive of dividends. Asked in a 2010 investor meeting why the company never made payouts to shareholders, he said that they wouldn't increase the value of the business:
Which would you rather have us be? A company with our stock price, and $40 billion in the bank? Or a company with our stock price and no cash in the bank?
There's a lesson in that for Qantas Chief Executive Officer Alan Joyce, who declared his first dividend in more than seven years with annual results Wednesday.
Shareholders who have stuck by Qantas through Joyce's turbulent tenure may feel entitled to a reward. After taking office in the teeth of the financial crisis in late 2008, Joyce grounded Qantas's global fleet in an attempt to break industrial action by flight unions; drove the company to its first-ever loss since a 1995 public market listing; begged the government for a debt backstop amid a market-share war with Virgin Australia; and finally announced plans to cut 5,000 jobs to return the business to profit.
But that debt has already been paid. The shares have almost tripled in value since the start of 2014, and holders received A$1 billion ($760 million) in buybacks and share consolidations last year, with another A$366 million announced Wednesday. Why bother with a dividend as well?
That's particularly the case in Australia, where quirks of local corporate law make dividends paid by Qantas at present a particularly poor use of shareholders' funds. The country uses a system known as franking credits to prevent double taxation of company profits, increasing the value of payouts received by domestic investors in proportion to the tax already paid on the income statement.
That causes companies like Qantas, which must by law be at least 51 percent-owned by local shareholders, to keep a close eye on their franking balance -- the notional credit with the government they've run up by paying company tax, and can run down to sweeten their dividends. If you don't have the franking balance to offset the tax liability, there are more efficient ways of giving cash to shareholders than paying a plain-vanilla dividend.
Thanks to an A$1.1 billion tax benefit received in 2014, Qantas has been a net beneficiary rather than a contributor to the tax office since Joyce took over in 2008 -- to the tune of about A$411 million. As a result, its franking account is still lingering at subdued levels. Once its current 7 Australian cents is paid, the remaining A$26 million balance would be enough to cover less than 3 cents a share of further dividends, until another 12 months or so of profits restore the franking account to more positive territory.
Joyce said Wednesday he won't worry about whether tax credits are available before deciding to pay future dividends -- but he should.
For those who've suffered the rollercoaster ride of Qantas's share-price performance over the past few years, a predictable dividend policy may sound attractive, but it's an illusory benefit. Such policies are a way for executives to signal to shareholders that they're determined to jump through hoops to iron out the volatilities of the business cycle and bestow a consistent income stream on their investors. No reasonable person ever bought airline shares for their sane and stable cash flows, however.
Indeed, volatility -- see that 286 percent Qantas share-price increase since the start of 2014 -- is one of the main reasons to own a highly leveraged, low-margin business like an airline.
Joyce quite sensibly abandoned the practice of giving earnings forecasts, in recognition that the chaotic nature of the airline industry makes such prognostications a fool's game.
He should do the same thing with his dividend policy. If oil were to jump to $100 a barrel and AirAsia or Singapore Airlines decided to go to war on Qantas, there's no amount of solemn promises now that would stop future executives cutting payouts to keep cash flows positive.
Airlines aren't utilities -- and they're being more honest with their shareholders if they don't act like them.
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