Britains largest companies dependent on debt for dividends

Recent analyses reveal that many of Britain’s largest corporations are increasingly resorting to substantial debt to finance dividends for their private equity owners. Over the past five years, companies that have exited from the London Stock Exchange have collectively disbursed dividends amounting to $2.7 billion, backed by borrowed funds.

These dividend recapitalisations are becoming more commonplace as investors seek to receive cash returns. Market turmoil has triggered concerns regarding the valuation of companies affected by recent technological advancements, making traditional exits more challenging. Amid these uncertainties, it is perceived logical for high-performing companies to return capital to investors, thereby allowing them to redeploy funds elsewhere.

In a notable instance, Darktrace, a cybersecurity firm, raised $750 million in debt to facilitate a dividend to its private equity owner, Thoma Bravo. Analysts acknowledge that such transactions must maintain a balance, as there is a risk that shareholders, having already extracted value, may become less committed to supporting the business going forward.

Aggreko, a provider of energy services for major events, also exemplifies this trend. The company raised $1.15 billion to fund a dividend worth $550 million, leading to a downgrade in its credit outlook. While Aggreko continues to experience growth, the commitment to returning capital to investors through debt poses questions regarding its long-term financial health.

Companies like Homeserve and Signature Aviation are similarly venturing down the path of debt-funded dividends shortly after going private. This tactic, while appealing in providing immediate returns, raises concerns among lenders about the long-term viability of businesses burdened by elevated debt levels.

Analysts suggest that a cautious approach is essential; companies should avoid overly aggressive financial policies that prioritise shareholder returns at the expense of capital reinvestment and operational stability. Maintaining a sustainable balance between rewarding investors and ensuring the continued growth of the business will be pivotal in navigating these challenging financial waters.