Aer Lingus has asked shareholders to approve technical adjustments to its balance sheet that would enable it to pay special dividends in the future.
The Irish airline has not made any dividend payments to shareholders since it was floated in 2006. In recent months Ryanair, which holds a 29.8 per cent stake in Aer Lingus, has repeatedly called on the company’s board to return cash to shareholders. Aer Lingus management has so far rejected the calls, citing the current unstable economic conditions.
Aer Lingus chairman Colm Barrington wrote to shareholders on Wednesday requesting that they sanction the cancellation of up to €500m in non-distributable reserves, freeing up the cash to potentially pay a dividend in the future. The company has called an extraordinary meeting on November 4 to approve the changes.
Under Irish company law any dividends on ordinary shares must be funded from distributable reserves, regardless of whether the company has enough cash to pay them. This has limited Aer Lingus’s ability to pay dividends due to the €210m of accumulated losses on its balance sheet built up during past periods of sustained losses.
Mr Barrington’s letter to shareholders said the company was not contemplating the immediate payment of a dividend but wanted to increase flexibility for the future. At the end of June Aer Lingus had €357m net cash on its balance sheet.
“The board is not currently contemplating the payment of a dividend to shareholders (or the redemption or repurchase of ordinary shares) and the board believes that it is in the best interests of the company and shareholders as a whole to consider a dividend when there is a more durable recovery and consequent earnings visibility,” said Mr Barrington.
Joe Gill, analyst with Dublin-based Bloxham stockbrokers, told the Financial Times that Aer Lingus shareholders, which include Ryanair and the Irish government, would likely support the changes and forecast that a dividend could be paid in the future.
“Aer Lingus is well capable of paying a dividend. A special dividend in Aer Lingus may also be an alternative method for the government to extract some value from the company without selling its 25 per cent stake,” he said.
Royal Bank of Scotland said in a research note said the proposal by Aer Lingus was a “modest positive” for Ryanair in terms of both the potential cash flows from its shareholding in Aer Lingus and the way it would potentially make the stake more attractive to a potential buyer.
Ryanair responded to the Aer Lingus statement by publishing an open letter to Mr Barrington urging him to reply to a September 28 message in which the carrier outlined its proposals to reverse the collapse of the company’s share price. Ryanair asked Aer Lingus to consider a €110m special dividend.
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