Tank account

VW's stingy dividend may presage more M&A

Volkswagen may be filling up its tank for another big acquisition. Despite a 20 per cent dividend increase on Thursday, the world's second-largest automaker's payout to shareholders still looks parsimonious.

At the end of 2014, the Wolfsburg-based motor manufacturer's net cash position had swollen by five per cent to Euro 17.6 billion. And that was after spending Euro 6.5 billion buying out minority shareholders in truck maker Scania and Euro 2.3 billion strengthening the equity position of its financial service arm. With sales rising and profitability on the mend, analysts expect cash generation to remain strong.

The dividend increase roughly matches the rise in earnings per share and sees it handing over a measly 21.2 per cent of last year's EPS. Volkswagen itself has promised shareholders a 30 per cent distribution ratio in the medium term.

Elsewhere, hoarding of this sort might lead activist investors to push for a higher payout, as a group of hedge funds recently did with General Motors. Volkswagen is insulated from such pressure: most voting shares are controlled by the Piech family and the state of Lower Saxony. But it's hard to see why the group wants to hold so much cash. It only needs about Euro 10 billion in net liquidity to safeguard its investment grade rating.

What's more, investors will be asked to authorise a potential increase of the non-voting share capital by up to 15 per cent at May's annual meeting. If that new equity is issued at a 10 per cent discount to the current share price, Volkswagen would get its hands on an additional Euro 15 billion. With 7.6 billion in disposable net cash and annual free cashflow of Euro 4 to Euro 6 billion, a Euro 30 billion deal could be well within Volkswagen's reach.

Volkswagen's ambition is to become the world's "number one mobility enabler." So far, that has led it to acquire Porsche sports cars, Ducati motor bikes, and MAN and Scania lorries. But it lacks a meaningful exposure to the North American truck market. Gobbling up the $27 billion American peer Paccar would close that hole, though Volkswagen has firmly denied rumours it would bid for the company in 2015.

VW's dividend will surely rise if its appetite for M&A has been satisfied. But the wolves of Wolfsburg may be readying themselves for more deals.