Why Yancoal suspended its dividend - and what investors could do now

Despite declaring an interim profit of over $400 million and revealing a $1.55 billion cash balance with no debt, Yancoal (ASX: YAL) has suspended its interim dividend. Part of it might have to do with the decline in revenues, spurred on by a 37% year-over-year decrease in coal prices. Part of it could be due to rumours that it wants to buy out Anglo American's Queensland coal operations.

But whatever the reason, shareholders who bought Yancoal purely for its chunky payouts are clearly very unhappy. Shares fell nearly 15% in yesterday's trade. 

So what should you do now if you thought this was a dead certain dividend play? And what lessons can we learn from this stock story? In this wire, I'll take a closer look.

Key figures

• H1 revenue of $3.14 billion ($3.98 billion in 1H 2023)
• The revenue decline was blamed on a 37% decrease in realised coal price to A$176/tonne
• Attributable sales +17% year-over-year
• Operating EBITDA of $990 million, EBITDA margin of 32%
• Cash balance of $1.55 billion with no debt
• "The Board has not declared an interim dividend in respect of the six months ended 30 June 2024, with the retained cash providing flexibility for potential corporate initiatives and may be distributed in the future if not."
• Production guidance for FY24 left unchanged

Results commentary

Yancoal had a solid half for the year operationally, with coal production volumes rising almost 20% and a unit cost reduction of 7%. This was counterbalanced by a fall in realised coal prices with both thermal and met coal markets softening considerably. 

This affected profitability on a PCP basis, with the company delivering an NPAT figure of $420 million for the half and ending the half with a cash balance of $1.55 billion.

Despite having $1.55 billion in cash reserves, Yancoal halted its usual periodic dividend. Whilst ostensibly the reason provided was that this cash balance could be utilised for M&A purposes, specifically in purchasing met coal assets. 

We believe that it also reflects Yancoal's cautious approach in the face of ongoing market volatility and uncertainty regarding thermal and met coal prices; both of which have suffered from soft market conditions.

On its M&A plans

M&A transactions may come with a range of risks: integration, operational, and financial to name a few. Yancoal has highlighted that it is open to exploring a range of transactions both in coal and non-coal commodity investments, which may materially shift the value proposition for certain subsets of shareholders.

M&A is also inherently riskier than distributing cash to shareholders to deploy as they see fit, so the move to halt dividends has significant implications for investors who were in Yancoal primarily for its strong income yield. 

The absence of a dividend payout could lead to a decline in investor confidence and possibly result in a sell-off by income-focused investors, as evidenced by a sharp drop in Yancoal's stock price following the announcement.

What should dividend investors do now?

For those who rely on dividends as a key part of their investment strategy, Yancoal's decision may prompt a re-evaluation of their investment in the company, especially should coal prices remain depressed and dividends not paid.

Yield-focused investors should always be aware that market conditions and corporate strategy may change and significantly affect a company's capital management policies. Investors blindly chasing yield should beware, especially if distributions are not structurally entrenched. An example is in a trust structure, such as a REIT, where excess income must generally be distributed to unit holders.

Despite the corporate decision, Yancoal's underlying asset portfolio remains one of scale and quality. We expect the company to continue to produce profitably in this soft price environment, given the nature of its asset base.

Would we buy, hold, or sell Yancoal?

Yancoal has been downgraded to a HOLD in our opinion. The rationale for this is that the latent risk has risen given that the percentage of cash relative to the company's market cap, makes the company appear overcapitalised. 

Accordingly, we believe there is an inherent risk in inorganic M&A activities, such as the possibility of overpaying for assets and the potential of diversifying into commodities that are not contemplated by investors, despite this potential being highlighted in the company's annual report. Coal or commodity price risk is just one, albeit major, aspect in assessing Yancoal as an investment prospect.

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