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About a year ago, when Panalpina traded around its current level of CHF120 a share on the stock exchange, I wrote that the Swiss freight forwarder had been forced to bow to the cyclical headwinds that had materially affected the business of many of its clients.

These headwinds are now fully apparent.

Its latest financials, released on 20 July, confirm the company lies between a rock and a hard place, having done little over the past year to entice either myself or other analysts to become more bullish on its valuation and corporate strategy – and that’s despite finding itself on a more reassuring footing, at least financially.

“Don’t mention a change of ownership this time,” a senior deal-maker in London warned me this week as I researched this article.

Results

After announcing its 2017 half-year results, Panalpina’s stock fell by as much as 12%, and has since recovered just 4% of its lost value.

Clearly, this was not just a bump on the road – its shares now change hands at the same rate they traded in mid-2013 (as well as in mid-2008), spurred by a dividend yield that has comfortably beaten inflation during the period.

Panalpina share price

Panalpina share price (Source: Yahoo finance UK)

However, its dividend policy now deserves serious scrutiny, because it is possible the payout could become unsustainable if a profit warning, or more profit warnings, occurs through to 2018. Counter-intuitively, if management is truly committed to the dividend and, in turn, shareholder value, both dividend risk as well as the real risk of earnings erosion work in favour of a sizeable acquisition.

That’s because the promise of hefty synergies usually does the trick to propel stock prices, at least in the short term.

Trailing figures

In 2015, the dividend it paid almost equalled the full amount of net earnings it generated; while last year, dividends per share exceeded the comparable net income figure by quite some margin, also due to certain one-off charges that negatively impacted its reported unadjusted figures.

Based on consensus estimates from Thomson Reuters, the company is expected to generate earnings per share of CHF3.67, with dividends at CHF3.75, for a payout over 100% in 2017.

Dividends have risen fast in recent years, but management seems to have forgotten it should use a combination of different tools for capital allocation, which, in theory, should drive capital appreciation.

Currently, “M&A upside” appears to be limited to small bolt-on deals, while stock buybacks are unlikely to surprise investors, given management’s cautiousness in the way debt and equity capital is managed and deployed.

Perhaps Panalpina’s board is correct to ask for more time to make a success of its restructuring – although if it is successful, it could spell more troubles for employees.

(In the meantime, it is tempting to suggest it would do well to explore the logic of a debt-funded buyback.)

Risk

It is important to consider that in finance, dividends usually represent a full mid-term commitment to shareholder value by management, so there is obvious risk with Panalpina that confidence could be undermined by a meaningful dividend cut.

Ultimately, in my opinion, it could be a choice between investor value, or yield, and staff retention. As far as the latter is concerned, recent trends are already scary, but should not surprise our readers.

“Panalpina needs better cost control, but it could mean job losses” was the headline of a column I wrote in late October 2015.

The tables below show relevant trends for personnel expenses and number of employees in recent years.

 

Panalpina Headcount

Panalpina Headcount (Source: Panalpina)

 

Panalpina costs (source: Panalpina)

How many?

The company is already scraping the barrel when it comes to saving precious cash at operating level, as proved by a reduced headcount. Staff expenses are by far the biggest cost on the income statement, and Panalpina now has 14,572 full-time (FTE) employees worldwide, down from about 16,180 in 2014.

It has somehow rewarded shareholders during the period, paying out more in dividends for each dollar it earned, as it said in its 2016 results: “The shareholders’ meeting held on 10 May 2016 approved a dividend of CHF3.50 per share that was distributed in respect of the business year 2015. The total dividend paid in 2016 amounted to CHF83.1m (2015: CHF65.2m).”

A lower headcount is needed to preserve the payout – but what this has also shown is that the company saves about CHF52,000 (US$53,600) for each employee it gets off the books (a figure that is implied in its own numbers).

Personnel costs as a percentage of gross profit stood at 61% in 2016 (roughly in line with previous years); if that ratio is to be maintained, how many will it need to let go this year and next?

Well, if first-half trends are confirmed, gross profit will end up being below the CHF1.4bn threshold for the first time in years – since the annus horribilis of 2009 when it posted a gross profit of CHF1.376bn – which could mean between 500 and 1,000 employees losing their jobs this year alone.

Which leads me to wonder whether 2017/18 could be a remake of 2009/10.

“The net cash used in financing activities improved significantly from minus CHF57m in 2009 to minus CHF 8m in 2010,” Panalpina said in the aftermath the financial crisis.

“The largest part of this improvement relates to the suspension of dividend payments in 2010, based on the minimal net profit that the group had generated in fiscal year 2009. Dividends paid in 2009 (for fiscal year 2008) amounted to CHF45m,” it said in its 2010 results.

In those years, personnel costs were only up to $20m higher than in these days: 2009 was CHF879m; 2010 was CHF890m; last year was DHF870.5m and for the first half of this year CHF432.5m.

So it’s all pretty simple, right? On the basis above, I wouldn’t be surprised if the dividend was halved by mid-2018 – unless, that is, something unthinkable comes to fruition and it joins forces with a rival.

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