(Bloomberg) — Bayer AG plans to cut its dividend by 95% to dig itself out of the hole created by its takeover of Monsanto Co., which has saddled the German company with massive debt and waves of litigation.
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While a dividend cut was expected, the cut highlights the challenges the drug and crop research company faces as it tries to rein in its cash flow, rebuild its pharmaceutical pipeline and recover from the $63 billion takeover of the owner of the herbicide Roundup to recover in 2018.
Bayer said it would offer investors only the minimum required under German law, paying out 11 euro cents ($0.12) per share in 2023, down from 2.40 euros last year.
The company has faced thousands of lawsuits alleging that Roundup caused cancer, something the company denies. According to a recent report, the mountain of debt of more than 38.7 billion euros is becoming increasingly difficult to manage due to rising legal fees and rising interest rates.
The stock was little changed on Tuesday. The shares have lost around two thirds of their value since the Monsanto transaction.
Chief executive Bill Anderson, who was brought in last year to try to revive the group, said the decision to pay out only a statutory minimum amount over the next three years was “not taken lightly”.
Anderson has already initiated operational changes aimed at speeding up decision-making, cutting management levels and eliminating thousands of jobs. He is also reviewing the strategy of the conglomerate, which currently includes three divisions focused on plant science, pharmaceuticals and consumer health products.
“Strategic measures”
According to Charlie Bentley, analyst at Jefferies, Bayer will save around 2.3 billion euros in each of the next three years as a result of the dividend cut. But with litigation and pension liabilities still high, the company will likely have to resort to other “major strategic moves” to repair the balance sheet, Bentley said.
The story goes on
Bayer has already agreed to spend up to $16 billion to settle the Roundup litigation. Bayer still faces tens of thousands of lawsuits over the matter, and investors and analysts are wondering whether the company needs to increase spending. In addition, Bayer is also facing expensive litigation over other Monsanto products, including the herbicide dicamba and toxic PCBs.
Read more: Bayer avoids dissolution despite investor pressure
Bayer also faces other challenges. The prices of agricultural raw materials are falling, which is reducing the sales of the crop science department. The pharmaceutical division is struggling as patents expire on its best-selling drugs, blood thinner Xarelto and eye drug Eylea, and could struggle to grow later in the decade.
In November, Anderson said he expected to generate no free cash flow in 2023 despite nearly 50 billion euros in revenue, which he described as “simply unacceptable.” Later that month, Moody's Investors Service lowered its outlook for Bayer to “negative” from “stable,” citing a series of drug pipeline setbacks and legal setbacks that had caused Bayer's stocks and bonds to plummet.
More flexibility
“One of our top priorities is reducing debt and increasing flexibility,” Anderson said in Monday’s statement.
With the dividend cut, Bayer is following the steel group Thyssenkrupp AG, which suspended its payments for four years in 2019 in order to curb the outflow of funds. Many companies have also taken such steps during the Covid pandemic when revenues were limited.
“Bayer’s decision to cut its dividend underscores the company’s difficult free cash flow position,” said Michael Shah, a pharmaceutical analyst at Bloomberg Intelligence. The proposed dividend represents a payout ratio of just 2%, he said, compared to the 30-40% rate paid in previous years and a consensus of 35%.
“While the cut is not a complete surprise, its magnitude is likely to dampen sentiment even further,” he said.
(Updates with releases)
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