Lending Association

RWC’s acquisition strategy and dividend adjustment

Last week, the global plumbing supplies and services group RWC (ASX:RWC) revealed its $160 million purchase of the Australian company Holman Services, which operates in adjacent sectors.

On Monday, RWC reported lower revenue and earnings for the December half-year and maintained guidance for similar performance over the year to June. However, it announced a significant change in dividend payout, aiming to retain as much cash as possible.

The change appears linked to the financing of the Holman purchase, which will involve debt and available cash flows. RWC plans to switch from a 100% cash dividend to a 50% cash and 50% on-market buyback approach to maximize cash flow.

Under the new policy, RWC intends to distribute between 40% and 60% of annual NPAT, with approximately 50% allocated to cash dividends and 50% to on-market share buybacks.

For the December 2023 half-year, RWC declared a total distribution amount of 4.5 US cents per share, with half as an unfranked interim cash dividend and the remainder allocated to an on-market share buyback.

RWC reported a 61% increase in cash flow from operating activities for the December half-year, attributing the improvement to reduced working capital, particularly lower inventory levels.

The company has reduced debt by $142 million over the year, providing flexibility for the Holman acquisition.

Although the dividend adjustment may eventually result in a similar cash payout to shareholders, it will occur over a longer period, and some shareholders may choose not to participate in the buyback.

Earnings for the half-year saw a slight decrease in net sales but stable performance in the Americas, while the UK and Continental Europe faced challenges due to weak economic conditions.

RWC’s CEO, Heath Sharp, remains optimistic, expecting stable operating margins and strong cash flow generation for the year ending June 30.