Judging whether the dividends of a listed company belong to Ponzi dividends is of great help to investors to judge whether the company exceeds its ability to pay dividends. However, this method is not flawless, and Wanhua Chemical, which has been growing rapidly for 22 years, may be a special case.
Sun Xudong, a special researcher of this journal.
When talking about the issue of dividends paid by listed companies beyond their capacity, we cannot but introduce the views of Professor Xie Deren of the School of Economics and Management of Tsinghua University. In 2013, Professor Xie published an article entitled "Theoretical Research on the Dividend Capacity of Enterprises", in which he proposed the concept of "Ponzi dividend", which is considered by the academic community to be a groundbreaking research.
Ponzi dividends
On December 15, 2023, the China Securities Regulatory Commission (CSRC) issued the Guidelines for the Supervision of Listed Companies No. 3 – Cash Dividends of Listed Companies (the "Cash Dividend Guidelines"), proposing to strengthen the constraints on enterprises that exceed their ability to pay dividends and guide reasonable dividends. Article 13 of the Guidelines on Cash Dividends stipulates that the CSRC should pay close attention to the following situations:
If the listed company has a high proportion of cash dividends in the net profit attributable to shareholders of the listed company in the current period, it should focus on whether the company's cash dividend policy is stable. Among them, for those with high asset-liability ratio and poor operating cash flow, focus on whether the relevant decision-making procedures are legal and compliant, whether they will adversely affect production and operation and solvency, whether there is excessive reliance on new financing dividends, whether the directors, supervisors and senior management are diligent and conscientious, whether they facilitate the participation of small and medium-sized shareholders in decision-making in accordance with regulations, and whether there are obviously unreasonable or whether the relevant shareholders abuse their shareholder rights and improperly interfere in the company's decision-making.
Professor Xie believes that his research can provide answers to determine what is an excess of capacity dividend. In an interview with reporters in December 2023, he made the following statement:
Free cash flow creativity should be used as a key indicator to identify abnormal dividend behavior of listed companies. This is because if the cumulative free cash flow of a listed company from the perspective of shareholder value creation since its inception is negative, it means that the investment cost and debt financing cost of the listed company have not been fully recovered by relying on the net cash flow of operating activities The state, this listed company has no ability to continue to pay dividends, and the forced dividends in this state belong to "Ponzi dividends" in nature.
The so-called "financing dividends" in the CSRC's new dividend regulatory guidelines are actually the "Ponzi dividends" that I proposed ten years ago and have been studying for nearly ten years (referring to the dividend behavior with Ponzi ** characteristics, that is, from the cash of dividends**, which comes from the cash incorporated from financing activities). Ponzi dividends are unsustainable and detrimental to long-term shareholder value creation.
Case study of Yangyuan drinks
Let's use Professor Xie's method to analyze Yangyuan Drink (603156sh）。Not long ago, this company was removed from the constituent stocks by the CSI Dividend Index because it paid too many dividends in the past three years, and the average dividend payout ratio in three years exceeded 1.
The figures in Table 1 are all from the company's annual reports and have not been adjusted. Free cash flow = net cash flow from operating activities + net cash flow from investing activities. According to Table 1, from its listing in 2018 to 2022, the free cash flow of Yangyuan Beverage has been insufficient to pay dividends, profits and interest payments in the five years, with a difference of 209.3 billion yuan.
However, we also need to make an important adjustment - to remove the cash from investment banking activities such as wealth management products and other activities from investment activities. The reason is very simple, investment bank wealth management products will not have an impact on the dividend ability of enterprises, nor are they necessary investments for business activities. According to Professor Xie's approach, we don't need to make adjustments to the annual data, just the totals.
At the end of 2022, the balance of Yangyuan Beverage's bank wealth management products was 74$2.6 billion, in addition, $400 million in debt instruments invested, totaling $78.8$2.6 billion. Put this 78With the addition of $2.6 billion, the cumulative free cash flow of Yangyuan Beverage increased to 155$5.4 billion, and the cumulative free cash flow - cash for dividends, profits and interest payments became 573.3 billion yuan.
Based on this, we can make a judgment - Yangyuan Drink does not have Ponzi dividends, and there is no problem with its high dividends.
According to Professor Xie's definition and method, judging whether a listed company's dividends are Ponzi dividends is of great help to investors to judge whether the company is beyond its ability to pay dividends.
Wanhua Chemical Case Study
Still, I don't think any method is perfect, and Wanhua Chemical (600309.)SH) as an example. When I saw Professor Xie's definition of Ponzi's dividend, I immediately thought of Wanhua Chemical - I once said when commenting on its 2021 profit distribution plan: "Another reason why I give Wanhua Chemical's dividend plan a high evaluation is that the company's free cash flow in 2021 is negative, in a sense, the company needs to lend money to shareholders to pay dividends." ”
Wanhua Chemical went public in 2001 and has been on the market for 23 years. At the end of 2022, Wanhua Chemical did not have any projects that needed to be adjusted, such as bank wealth management products. You can use the data in Table 2 directly.
From the perspective of "accumulated free cash flow - cash for dividends, profits and interest payments", Wanhua Chemical is an out-and-out Ponzi dividend. In fact, the company's "free cash flow - cash for dividends, profits and interest payments" that began in 2006 has turned positive for three years, but with the start of a new round of major investment activity, the indicators have become negative again. And, the same thing happened again in 2016.
Professor Xie once pointed out that the free cash flow of an enterprise has turned from negative to positive in the middle and late stages of the rapid growth of the enterprise and will enter a period of long-term large-scale positive, which is the "best gift" of the enterprise. In this way, Wanhua Chemical has experienced two "best gifts", but it still grows up like a teenager. Wanhua Chemical will achieve an operating income of 1655 in 20226.5 billion yuan, an increase of 478 over the year before listing (2000).90 times, with an average annual growth rate of 32%;The net profit attributable to shareholders of the listed company was 1623.4 billion yuan, an increase of 32368 times, with an average annual growth rate of 30%.
Wanhua Chemical's business is so good that I know it's borrowing money and dividends, but I don't think it's such a terrible thing. On the premise of ensuring financial security, I even think this is a good thing - shareholders are able to share the dividends earlier, and the company's equity value is increased;Banks can lend more to Wanhua Chemical, and they can also get more interest income. In fact, the bank is very confident in Wanhua Chemical - in 2022, the highest annual interest rate of Wanhua Chemical's long-term loans is only 390%, which is 475% is 085 percentage points.
Professor Xie believes that companies that have long relied on fundraising activities to incorporate cash will eventually fall into Ponzi**, let's take a look at the statements in related reports:
In the long run, if an enterprise cannot create free cash flow, it will not be able to continue to create value for stakeholders, and it has a high probability that it will objectively be in a double Ponzi state of "Ponzi interest" and "Ponzi dividend" by relying on the cash obtained from financing activities to pay interest and dividends to shareholders. Xie Deren pointed out that an enterprise that cannot hold a "first-class ceremony" for a long time must be an enterprise that cannot create value for direct stakeholders. Xie Deren believes that if an enterprise has passed a period of rapid growth and has long-term profits and even economic added value, but has no free cash flow, it is likely that the enterprise is using the cash incorporated into fund-raising activities to buy profits, which can be described as "taking drugs." Drugs are profits, and drug funds are cash incorporated into fund-raising activities.
A company that has been living on 'gnawing the old' (financing activities into cash) for a long time will eventually fall into the abyss of Ponzi **. Xie Deren said.
What is special about Wanhua Chemical is that its high-speed growth period has exceeded people's expectations and even cognition. Typically, when we value a company using the discounted cash flow method, we expect its high growth period to be 5 to 10 years. However, Wanhua Chemical has been growing rapidly for 22 years.
Because Wanhua Chemical has been growing rapidly for 22 years, I think it is very unlikely that it will "take drugs", and if it is to spend money to buy profits, it is unlikely to last for 22 years.
In a lecture on December 17, 2023, Professor Xie pointed out that enterprises calculate net profit and economic value added (EVA), but do not necessarily earn free cash flow, because: first, because the quality of cash flow from operating activities of enterprises may be very low, which is not enough to help enterprises recover investment costs and pay interest, and profits exist in non-cash assets such as accounts receivable, inventory, and even fixed assets and intangible assets, which are only "rich on paper".
So, is Wanhua Chemical's profit rich on paper?Let's take a look at the changes in Wanhua Chemical's accounts receivable, inventory, fixed assets and intangible assets in the past 10 years. When analyzing the financial aspects of these assets, it is common to observe and compare their turnover, i.e., whether they are more or less relative to operating income.
In 2002, Wanhua Chemical's accounts receivable, inventory, fixed assets and intangible assets reached the lowest level in 10 years. If the company's profits had been bought, it wouldn't have been the way it is now.
When will Wanhua Chemical take off the Ponzi dividend hat?I guess to be patient.