Honeywell Nigeria Plc, the makers of Honeywell Pasta and Noodles released its annual report for the period ended March 2016. The company’s reported a revenue for the year was up 4% to N50.8 billion compared to N49 billion a year earlier. Despite the moderate increase in revenues, Honeywell ended up reporting a loss of N3 billion for the year ended March 2016 (N2015:N1.1 billion profit).
This loss will be Honeywell’s first loss in about 5 years and is mostly attributed to the company’s rising cost of sale and other operating expenses. The company divides its business into two major operating locations, Ikeja and Apapa. Its Ikeja Segment reported a segment loss of N346 million compared to a profit of N100.4 million year earlier.
Its Apapa segment reported a segment loss of N1,6 billion compared to a profit of about N2 billion. Its Apapa business faired badly because of a spike in cost of sales to N37.4 billion (2015: N32.8 billion). Its operating expenses also rose from N4.3 billion in 2015 to N5.6 billion in 2016. This effectively ensured that its revenue growth from N38.7 billion (2015) to N41.2 billion (2016)did not reflect in bottom line.
Based on this losses Honeywell decided against paying dividends even though it could still have paid if they ‘had the cash’. Honeywell has about N5.9 billion in retained earnings after this result meaning it could still have been able to squeeze out some money to pay dividends. Companies are allowed to pay dividends out of their retained earnings even if they made a loss during the year. Paying dividends out of retained earnings means that you are paying dividend out of past profits that you did not distribute to shareholders.
Honeywell paid out about N396.5 million in dividends to its shareholders last year which is less than 10% of what it currently has in its retained earnings. It also has about N15.5 billion in cash at the bank. So why is it not paying? Honeywell is not paying dividends because it owes banks a total sum of about N51.2 billion. Out of that amount, about N40.1 billion is current, meaning that they fall due within a year. It used most of the money to acquire Property, Plants and machinery.
Considering the cash constraint the company is currently facing, it is morally impossible for banks to allow them pay dividends from borrowed funds. The N15 billion currently in the bank is mostly overdrafts and as such may breach convenience signed between the company and the bank. Companies often sign covenants precluding them from paying dividends when they declare losses or if they have debts to settle. We doubt Honeywell generates enough cash flow to service its debts based on its current results.