What just happened to the Ferrexpo dividend?

Often, a high dividend yield can be a red flag for investors about what will happen in the future. In November, for example, I wrote about Ferrexpo (LSE: FXPO), said “The dividend yield of 27% looks set to drop“. At that time, the interim dividend had been cut by two-thirds. Today comes the news that Ferrexpo’s dividend has been fully liquidated!

Here I consider why the payment has stopped, whether this lesson can be for me as an investor – and whether the prospect of juicy future dividends can be a reason for me to start accumulating Ferrexpo shares now.

A difficult year

As a company with mining operations focused on Ukraine, Ferrexpo had a difficult year. Tragically, 20 employees have died in the war.

The company has continued production but the challenges of mining and especially transporting the output to customers saw the annual sales volume last year fall by 46%, while the revenue was halved.

Although diluted earnings per share and net operating cash flow both fell by about three-quarters, the company continued to generate substantial cash flow at the operating level. Net operating cash flow was $301m.

Dividends are cancelled

However, investment and financing cash flows are negative. Net cash outflows for the year totaled $61m. Part of the reason is that the company spent $155m on dividend payments. Today announced that, “No further dividends are proposed for the 2022 financial year”, effectively canceling the payment until further notice.

I think it may be a few years before the dividend returns, if possible. The company notes that various factors include “the uncertainty associated with war“and legal risk”can have a negative impact on the potential for future dividend payments“. That is not placed in the risk section of the annual report. This is in the dividend discussion of the main text.

Vision of the future

In order for dividends to be reinstated, let alone at previous levels, I think several things need to happen.

Production must reach a level where enough free cash flow is generated to support payments. Certain political and legal risks must also be resolved. The company’s controlling shareholders are embroiled in a legal battle with the Ukrainian state. Ferrexpo said this did not affect operations. However, it can affect the company’s ability to distribute funds to shareholders.

Importantly, these key risks are entirely or largely outside the company’s control.

Some investment lessons

The cancellation of the dividend shows the role of political risk when evaluating a company’s prospects. I think especially if their operations are very concentrated in one or two countries.

It is also a reminder of the risk of buying a trap.

Not only did Ferrexpo’s juicy dividend disappear, its share price also fell. That’s 14% lower than a year ago and a 59% drop over five years.

My movement

The risk here continues to be great. They are difficult if not impossible to fully assess and lie beyond their risk tolerance.

Ferrexpo could be good in the future. It has proven operational capabilities even in wartime, a large customer base and attractive assets. However, given the risk, I would not invest.