Hindustan Zinc (NSE: HINDZINC) shares are currently yielding 15% and change as a result of the substantial dividend announcement. That sounds just great of course. But the question does have to run through our minds. Is this being done for the benefit of all HINDZINC shareholders or more to the interest of the controlling shareholder, Vedanta?
It's possible to mull this both ways. Zinc mining is not a terribly volatile business, cashflows tend to be reasonably steady and so on. So there's no particular reason why a zinc miner should try to preserve a cash positive status. Carrying some debt in order to juice equity returns is a perfectly respectable option. Paying out excess cash, taking on debt in order to increase such a dividend, again a perfectly respectable, possibly even sensible, option for a zinc miner such as Hindustan.
However, when Vedanta is the 64.92% controlling shareholder we also need to think of this the other way around. As with the Adani Group focussing attention on this matter certain of the large Indian groups look as if they might be a bit cash short, possibly a tad overextended. So, draining the subsidiaries of cash might look good at that central nexus of Vedanta but not so much to the minority shareholders in those subsidiaries like Hindustan Zinc.
There's also that little issue of Vedanta wanting to sell its international zinc interests into Hindustan, something which the government isn't happy about. The government has a residual stake in Hindustan and so is interested in whether Vedanta might be overvaluing those foreign interests to be so injected.
It's also true that if you're looking to inject assets into a company it's a little odd to be draining cash from it at the same time. Or even just before, by a large dividend payment. Possibly better to inject some of the debt carried by the foreign interests at the same time as those assets.
The real problem here is that we just don't know. Which is always the problem with being a minority shareholder where there's a controlling majority shareholder. How much of what happens is to the interests of all shareholders equally and how much to those more specific interests of the controlling shareholder?
A high dividend at Hindustan Zinc is nice to have, of course, but it is driven by operating issues at Hindustan or more by some desire of Vedanta to access cash?
