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12 April 2012 23:12

How Barclays gains from its Absa stake: Jeanette Clark (Moneyweb) and David Shapiro (Sasfin)

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Alec Hogg is a writer and broadcaster. He founded Moneyweb

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    Absa’s substantial Barclays dividend payment, and a strong market today.

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    ALEC HOGG: Mr Shapiro, before we get on to you, you’ve got to listen to this story. Jeanette Clark is with Moneyweb. She looks after our Pretoria beat and our financial services, and she joins us now after a story, Jeanette, that you did looking back on Barclays, who came to South Africa in 2005 and bought a controlling share in Absa. Now take us through the story and how well Barclays have done from this investment.

    JEANETTE CLARK: I just basically looked at the dividends paid out since the transaction, and it's actually climbed quite steeply. In 2006 the first full year after  the transaction Absa only paid a dividend of 295c. That steadily climbed until the year 2011, when it was up to 684c already. Now, obviously you have to look at the dividend cover as well, but it has steadily dropped from about 3.8 dividend cover in 2004 down to only 2 last year.

    ALEC HOGG: Just hold on a second. Dave, what is dividend cover?

    DAVID SHAPIRO: Well, you can take that as a percentage of the profit that they are paying out, so 3.8 means…

    ALEC HOGG: David, you are confusing me. Let’s go slowly. If you’ve got a 3 times 8 cover, that would mean that your dividend of 100c is being paid from earnings of 380c. But now the cover, Jeanette was saying, is down to two times, so your dividend of 100c is being paid off profits of only 200c, which means you are putting a whole lot less back into the business.

    DAVID SHAPIRO: Sure, of course. I think that’s obvious, what Jeanette’s saying… So they are dragging it out of South Africa.

    ALEC HOGG: So the Londoners are struggling over there, and saying “we've got a nice, juicy little plum in South Africa called Absa, let’s take the money home”.

    DAVID SHAPIRO: Absolutely right. And I think Barclays – we know that there’s a lot or pressure on capital with Basel III and these companies have to rebuild their balance sheets, particularly Barclays.

    ALEC HOGG: So they are building it at the cost of the South African bank – or are we being a bit harsh about that, Jeanette?

    JEANETTE CLARK: Well, I did speak to some analysts and they are saying on a  compound interest rate it's only basically only 12% per year, which is what you would be looking at if you’re looking at listed equity.

    ALEC HOGG: But what kind of calculators are they using? R2.95 in 2005, R6.84 in 22011 – in six years double.

    JEANETTE CLARK: And also it means that from the original purchase price of R33bn at that time, they’ve received almost 40% back in the last six years. Sounds like a good investment to me!

    ALEC HOGG: And what's that R33bn worth today? In other words, what are the shares worth that they bought in Absa?

    JEANETTE CLARK: Well, I only looked at the market capitalisation and that’s worth R62bn at the moment.

    ALEC HOGG: So let’s get this right. They’ve got back 40% of their money via dividends already, in just six years, and their investment has virtually doubled.

    JEANETTE CLARK: Yes, exactly.

    ALEC HOGG: Jeepers, David, I think Trevor Manuel’s got a point. Don’t let these guys come and steal our best companies.

    DAVID SHAPIRO: The problem is that what would Absa have done with that money if it was left here?

    ALEC HOGG: Lent it to South Africa.

    DAVID SHAPIRO: Not only lending, but they would have expanded it as well. They would have looked for acquisitions, etc. And here it's now being handled through London, so you are sending it to London and they are going globally as well.

    ALEC HOGG: We've been so propagandised into believing that foreign investment is fantastic, “bring in the foreigners” – but jeepers, this Barclays/Absa, if you were one of those who said maybe we shouldn’t be courting the foreign, particularly Western foreign money as aggressively as we have, here you’ve got a case study of why it hasn’t maybe been in the country’s best interest.

    DAVID SHAPIRO: The difference is a Walmart coming in here. Walmart will come in to expand the operations here, in other words, to grow it into Africa. They’ve got a completely different strategy to Barclays, which is just seen as taking a lot of dividends out, according to Jeanette – I'm just trying to interpret this.

    ALEC HOGG: Jeanette, are you making this up, or are these proper numbers? [Laughter]

    JEANETTE CLARK: I used the numbers and the annual reports since 2004, so it's definitely not made up.

    ALEC HOGG: And what do your good friends at Absa have to say about it?

    JEANETTE CLARK: Well, they just reiterated that Barclays has no influence on their dividend policy [David laughing heartily] and that they take a lot of things into consideration when they look at the dividend.

    ALEC HOGG: Hang on a minute – Barclays has “no influence on their dividend policy”, but Barclays owns what percentage of Absa?

    JEANETTE CLARK: It's 55.5%.

    ALEC HOGG: And they have no influence on the dividend policy?

    JEANETTE CLARK: Well, according to Maria Ramos, one interview she had with us, she said: “Barclays never talks to us about dividends. Our minority shareholders, though, talk to us about dividends all the time.” That’s a direct quote.

    ALEC HOGG: That's our Jeanette Clark from Moneyweb, Moneyweb’s financial services expert. I think she’s got a great story there, David.

    DAVID SHAPIRO: Ja. One would expect that in this kind of climate. But it's disappointing. But don’t think that all acquisitions are like that.

    ALEC HOGG: You’ve got to take them on a case-by-case basis. Certainly this one doesn’t sit very well, particularly at a time when many South Africans are going to banks like Absa and saying: “Please lend us money, we need money to get our economy growing.”

    DAVID SHAPIRO: Have they got enough money, for example, to grow into other areas like the unsecured loans, which is becoming quite a big area. Have they got that kind of money now to expand? I suppose if Maria…

    ALEC HOGG: Is Absa expanding rapidly?

    DAVID SHAPIRO: I don’t now. I've got to look at that. They’ve been doing OK. I suppose shareholders are certainly happy, minority shareholders, because their dividend payback has increased, but you’ve got to look at it from a  broader point of view – what does this mean for Absa versus all the other banks, like FirstRand, going into Africa.

    ALEC HOGG: Just the markets today, Dave?

    DAVID SHAPIRO: Strong, strong. It's not the kind of story I like. Alec, what propped up markets was that Janet Yellen, who’s one of the senior Fed Reserve governors in the United States, probably just under Bernanke, made a statement that they are going to leave interest rates low until 2014. So again, we are propping up the market based on liquidity, on low interest rates, not on sustainability – although I know Google’s results are coming out, Hewlett Packard’s results are coming out and generally I think there’s an expectation that corporate results will be good. But we want to get into a situation where markets, economies are improving on their own steam rather than being propped up by low interest rates.

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