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Owner's Expectations Manual

7.6 Capital management

  • Shareholders expect SOEs to minimise the level of surplus capital on their balance sheets, without adversely affecting their ability to meet objectives under the SOE Act. SOEs are expected to return surplus capital to the Crown so that it may be used for other government priorities.

7.6.1 Optimal capital structure

  • Each SOE should have a target optimal capital structure (ie, the combination of financial liabilities and equity used to fund its assets). An optimal capital structure is one that, in light of economic, industry and company-specific factors, would provide for an appropriate credit rating, while at the same time imposing a discipline on the SOE to optimise efficiency.
  • To this end, the Government has a credit rating benchmark policy whereby SOEs are expected to have a capital structure consistent with a BBB (flat) credit rating (unless the SOE can demonstrate good reasons for an alternative benchmark). This is to ensure that all SOEs have appropriate financial disciplines to manage capital efficiently at similar risk levels.

7.6.2 Dividend policy

  • The level of estimated dividends (and forecast payout ratio) is set by the board after considering shareholding Ministers' comments through the SCI and business plan consultation process. It should aim to maintain, or progress toward, the company's optimal capital structure within defined and agreed timeframes.
  • However, under section 13 of the SOE Act, shareholding Ministers have the power to determine the amount of dividend payable by an SOE by giving written notice to the board of the SOE. Before giving written notice to the board, the shareholding Ministers must have regard to Part 1 of the SOE Act and consult the board concerned as to the matters to be referred to in the notice.
  • The level of estimated dividends is driven by each SOE's desired capital structure, profitability and the level of future capital expenditure as outlined in the business plan and SCI.
  • Shareholding Ministers expect SOEs to operate a dividend policy that:
    • translates to payouts that are commensurate with their listed peers
    • gives an appropriate balance between dividends and re-investment in the business, and
    • shows a degree of consistency and improvement over the years.
  • An appropriate dividend policy should relate to an agreed proportion of free cash flow measure rather than net profit after tax (NPAT). This proportion will, no doubt, reflect the maturity of the business and the investment opportunities the business faces.
  • The proposed dividend payout ratio and estimated dividend payment should be included in the business plan for each year covered by the plan.
  • Ordinary dividends, if any, may be paid in two instalments: an interim dividend and a final dividend. Special dividends may be paid as seen fit by the board.
  • Interim dividends, if any, are paid as soon as possible after the half-yearly report and final dividends, if any, as soon as possible after the annual accounts are finalised. The Treasury requests at least a week's notice of the actual date and amount before payment, which should be accompanied by a shareholder dividend payment statement. Shareholding Ministers may agree on variations to those dates, after consultation with the board.
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