The strong rise Friday and Monday in James Hardie Industries shares was explained yesterday with a statement that outlined significant capital management changes, including a buyback and a return to dividends, and a cut in the contribution to the Australian asbestos compensation fund next year.
Hardie shares had risen around 7.5% from last Friday to Monday for no reason other than a couple of brokers had lifted their recommendation for the stock in the past week or so.
Yesterday’s statement saw a further rise of 4% in the shares to a close of $5.90, a gain of 22c on the day.
The buyback was announced yesterday and it seems more will follow if the capital management statement is any guide.
Both statements came two days ahead of the company’s 4th quarter and 2011 financial year earnings report tomorrow.
Hardie said yesterday that it now was able to generate "strong cashflows", despite a continuing difficult operating environment, particularly in the US where the housing market remains depressed.
The company said it had adopted a policy to distribute 20%-30% of profit after tax as ordinary dividends, and to take a more active approach to capital management which was likely to see the company buy back or issue shares as capital needs dictate.
It expected dividend payments to resume with the company’s first half results in fiscal 2012 (ending March 31, 2012).
The company said it would buy back on market up to 5% of its issued capital over the next 12 months.
"After careful consideration and in seeking to create a more optimal capital structure, the board is pleased to announce the resumption of an active approach to capital management," said James Hardie chairman Michael Hammes.
"This opportunity arises because of the company’s ability to generate strong cashflows, and thereby reduced debt levels, despite the continuing challenging operating environment, particularly in the USA."
The contentious part of the statement was the news that Hardie says an internal restructuring of the company will lead it to cut its contribution to the asbestos injuries fund next year, possibly by more than $US11 million.
The cut will come as a result of a $32.6 million tax charge the company is expecting as a result of the restructuring.
That restructuring will allow the company to start the new capital management policy, including the resumption of dividends payments in the next year.
That news won’t sit well with asbestosis and other suffers in Australia.
Nor will the cost of the buyback: around $124 million at Hardie’s closing share price on Monday of $5.67.
"This charge will not impact the contribution to the Asbestos Injuries Compensation Fund (AICF) in July 2011, although it is likely to reduce the contribution to the AICF in July 2012 by up to $US11.4 million," Hardie said in its statement.
Hardie is contracted to pay 35% of net operating cashflow into the AICF. It missed making a payment in July 2009 because of the impact of an adverse tax ruling.
The company said the restructure was "to facilitate the ability to access and distribute surplus cash flows of the company’s operating subsidiaries more efficiently (including for the purpose of making periodic contributions to the AICF)".
"After careful consideration and in seeking to create a more optimal capital structure, the board is pleased to announce the resumption of an active approach to capital management," said Mr Hammes.
James Hardie said unaudited net debt at March 31 was $US40.4 million, down $US94.4 million from the end of the 2010 financial year.
The company said the effect of its capital management policy was that it expected to distribute "a significant portion of its operating surplus each year" as ordinary dividends and share buy-backs.
"In circumstances where the company determines that share buy-backs are not attractive, special dividends may be considered as an alternative," the company’s statement said.
The calculation of dividend payouts would not include asbestos adjustments, James Hardie said.
