August 21, 2023

LTG

LTG’s first-half earnings in 2023 are down by as much as 15% compared to the same period a year ago. The tobacco segment’s performance which used to be at least 70% of the overall income is now down to 45%. This is due to lower sales volume caused by higher taxes and competition against smuggled cigarettes. The question running now in the head of dividend investors is whether dividends would be sustained.

LTG’s performance recently might seem looking bad but not to the point that they’re losing the business. Looking at their recent financial statement, they still have a significant amount of cash in the balance sheet. Although as for LTG’s case, this is not a good basis if dividends would sustain. Historically speaking, LTG was mostly cash-positive but they declared lower dividends once a year. It was just in 2019 that they hit a net income of at least 20 billion PHP and started to give out dividends every quarter. From thereon until today, their trailing twelve-month net income is still above the 20 billion PHP threshold hence the declaration of quarterly dividend is sustained. However, I could be wrong about the basis of dividend sustainability. This is just a speculation based on current and historical data disclosed to the public. I do not have insider information as to why LTG became generous in giving out dividends. It is also valid to say that LTG might be returning shareholder value through increasing dividends since there is a minimum upside to share price appreciation due to a lack of growth.

As of the moment, the future of LTG remains uncertain. The tobacco segment that drives LTG’s core income is on a decline. Research data reported that smokers of at least 15 years old is down to 20% in 2021 from a high of 30% in 2009.  Starting next year, there will be a 5% increase in cigarette tax annually as per the Philippine Republic Act. This could further lower the sales volume of LTG and affect the dividend sustainability. For context, most of the dividends being distributed by LTG are earnings from the Tobacco segment. The earnings from LTG’s other business segments are not enough to offset the losses from the Tobacco segment. PNB, the banking segment and 2nd largest contributor to LTG’s net income should not be relied on for dividend sustainability because they do not pay dividends. For some investors, they believe PNB is just there to prop up the balance sheet of LTG. Without PNB, the financials of LTG might not be looking good.

SCC, DMC

The revenue of SCC and its parent company DMC declined in the first half of 2023 as compared to the same period a year ago. The decline in revenue was within expectation due to lower coal prices. The power segment of both SCC and DMC is doing great due to tight power supply in the country but unfortunately, it was not enough to offset the losses from the mining (coal and nickel) segment. Even though revenue has declined, their recent income is still the 2nd best first-half earnings to date.

What’s worrying would be the pessimistic outlook in the 2nd half of the year. Although coal prices will remain elevated, the power segment of SCC and DMC which is supposed to at least offset some of the losses from the mining segment will be facing some headwinds. SMC’s Ilijan 1200 MW power plant will be reintegrated back into the grid hence increasing supply and leading to lower power rates. Moreover, 3 of SCC’s power plants will undergo planned shutdown and hence will not be able to participate in the power spot market.

What’s odd in the past few trading days is that the share prices of SCC and DMC have not declined but rather gained high volumes of buying of shares above the average. Many market participants are speculating that SCC and DMC will declare another round of special dividends this coming September or October hence traders and investors are positioning early. For context, SCC needs at least 15 billion PHP to declare a special dividend of 3.50 PHP/sh and DMC needs at least 10 billion PHP to declare a special dividend of 0.72 PHP/sh. SCC and DMC are currently sitting on cash amounting to 27 billion PHP and 38 billion PHP respectively which is more than enough to cover the special dividends. The management has not made disclosures of incoming special dividends but the probability of it happening is high due to (1) SCC does not have much capital spending and the board of directors usually votes to give away the earnings as dividends and (2) the management has been accumulating shares which they usually do before any good disclosures comes out.

SCC’s prospects remain uncertain but one thing for sure is that their coal operating contract is set to expire in 2027. They plan to renew the contract if they are permitted by the Department of Energy to do so. Looking back, SCC entered the renewable energy space and we are yet to see the results in 2026. Moreover, SCC had plans to put up a cement plant in Semirara Island, a project that has been shelved due to the pandemic. Now that the country is reopening, the cement plant project is on the table as an option for diversifying outside the coal business.

DMC on the other hand is waiting for inflation and interest rates to ease. The real estate segment of DMC is suffering from high real estate sales cancellations and fewer real estate sales. Meanwhile, the construction segment remains stagnant because projects they have submitted bids are on hold. The developers who own these projects are in a wait-and-see mode due to the high-interest environment.