Nestlé’s released its 2014 Q2 some months back with pre-tax profits rising 5% to N11.8billion. The company also paid dividends of N24 per share back in May and has been a consistent dividend paying company. Nestle is also priced at N1,050 with a price to TTM earning multiple of 37x and has returned 14.39% this year to date.
However, a closer look at the company’s 2014 half year results suggest the company may have borrowed some funds to finance part of its dividend payments. A look at the cash flow statements indicates the company had an opening cash balance of N13.7billion at the end of the year December 2013. It generated about N3billion in net operating cash flows (cash from profits) at the end of June 2014. It then spent a net N1.8billion on acquiring fixed assets leaving it with a cash balance of N14.9billion from which it will use to pay its debts and pay dividends of N19billion, a N5billion short fall.
Therefore one can conclude it had to borrow N5.5billion in overdrafts to part finance part of its dividends. Its overdraft balance moved from N0 as at December 2013 to N6.9billion at the end of June 2014. It is important to note though that cash is fungible in nature as such there might be no direct link to the borrowed funds being applied to paying dividends.
Paying dividends with debts is also not illegal and does happen when companies believe they are temporarily short on cash flow. Typically, the debts are repaid soon after. Some companies also even prefer to borrow to pay dividends if the cost of borrowing is much lower than their cost of equity.
See excerpt of their cash flow statement below