Bayer AG, the German drug and crop sciences company, has announced plans to slash its dividend by a staggering 95% in an effort to address its mounting debt and litigation challenges. The decision comes as Bayer grapples with the aftermath of its $63 billion acquisition of Monsanto Co. in 2018, a move that burdened the company with significant debt and an onslaught of lawsuits. While a dividend cut was anticipated, the magnitude of the reduction underscores the uphill battle Bayer faces as it seeks to stabilize its finances, rebuild its pharmaceutical pipeline, and recover from the acquisition.
Bayer’s dividend for 2023 will amount to just 11 euro cents ($0.12) per share, down from €2.40 in the previous year. This reduction represents the legal minimum required under German law. The company’s debt currently exceeds €38.7 billion, a figure that has become increasingly difficult to manage due to rising legal costs and interest rates. Analysts at Morgan Stanley have emphasized the need for Bayer to adopt a more stringent dividend policy, potentially even suspending payouts altogether, in order to make progress in reducing its debt burden.
Despite the significant dividend cut, Bayer shares experienced a modest increase of approximately 1% following the announcement, as investors welcomed the prospect of at least some payout. However, the stock remains down more than 70% since the Monsanto acquisition. Chief Executive Officer Bill Anderson, who was appointed last year to revive the struggling company, emphasized that the decision to pay only the legal minimum for the next three years was not made lightly.
In addition to the dividend cut, Anderson has implemented operational changes aimed at streamlining decision-making processes, including reducing management layers and eliminating thousands of jobs. He is also reviewing Bayer’s conglomerate strategy, which currently encompasses three divisions focused on crop science, pharmaceuticals, and consumer health products.
The dividend reduction is expected to save Bayer approximately €2.3 billion annually over the next three years, according to analyst Charlie Bentley at Jefferies. However, given the company’s ongoing litigation and pension liabilities, it will likely need to pursue other major strategic actions to restore its balance sheet. Bayer has already committed up to $16 billion to resolve Roundup litigation, but it still faces tens of thousands of claims related to the herbicide. Furthermore, the company is grappling with costly litigation surrounding other Monsanto products, such as the herbicide dicamba and toxic PCBs.
Bayer also faces challenges in its crop science and pharmaceutical divisions. Slumping agriculture commodity prices have dampened sales for the crop science division, while the pharmaceutical division is contending with expiring patents for its top-selling drugs, Xarelto and Eylea. These factors may hinder the division’s growth prospects throughout the rest of the decade.
In November, Anderson expressed concerns about Bayer’s projected zero free cash flow in 2023, despite expected revenues of nearly €50 billion. Moody’s Investors Service subsequently downgraded its outlook for Bayer from stable to negative, citing setbacks in the company’s drug pipeline and legal issues that have caused a decline in its shares and bonds.
Anderson emphasized that reducing debt and increasing flexibility are among Bayer’s top priorities. The decision to cut the dividend aligns with this objective. Bayer’s move follows in the footsteps of steel conglomerate Thyssenkrupp AG, which suspended dividend payments for four years in 2019 to mitigate cash outflows. Numerous companies have taken similar steps during the Covid-19 pandemic when revenues were severely impacted.
Michael Shah, a pharma analyst at Bloomberg Intelligence, noted that Bayer’s decision to slash its dividend underscores the company’s challenging free cash flow position. The proposed payout ratio of just 2% is significantly lower than the 30-40% rate seen in previous years and consensus expectations of 35%. Shah believes that while the dividend cut was not entirely unexpected, its magnitude is likely to further dampen sentiment surrounding the company.
In conclusion, Bayer’s decision to drastically reduce its dividend reflects the significant financial and legal hurdles it faces following the Monsanto acquisition. The move is part of a broader effort to address the company’s mounting debt and litigation challenges. While investors may find some solace in the prospect of a meager payout, Bayer will need to pursue additional strategic actions to restore its balance sheet and regain stability in the face of ongoing legal battles and operational headwinds.