Fiat Chrysler Automobiles' generous pay outs to shareholders puts a question mark over how much-needed future investments for a combined FCA-Renault automaker will be financed.
If FCA's proposed merger with its French rival is approved by Renault's board, FCA shareholders will receive a 2.5 billion euro extraordinary dividend, plus another 250 million if FCA's Comau industrial automation company is not spun off or sold, which FCA is also proposing.
These payouts will come on top of the 2 billion euro extraordinary dividend that followed the sale of FCA components division Magneti Marelli to Calsonic Kansei and the 1 billion euro regular dividend paid out of FCA's 2018 net profit.
The 5.75 billion euro total payout comes from a company that was worth 25 billion euros before the distributions. It means that 23 percent of FCA's value will possibly be given back to shareholders in the form of cash.
The huge payout comes after a long drought. Fiat last paid a dividend in 2012 and FCA had never paid one before 2019. This year's payout, though, is partly financed by selling some of the group's assets and it raises doubts on how much the FCA controlling shareholder, the Agnelli/Elkann family, is intent on investing in the future competitiveness of the group.
FCA's late CEO, Sergio Marchionne, preached frugality, and FCA invested as little as possible during his tenure as CEO to help reduce debt. Marchionne's target of zero industrial debt was reached thanks to the long dividend drought but also because of a 2.6 billion cut of 2018 capital expenditures from 2017.
FCA has not invested in autonomous driving, choosing to be a junior partner of Google's Waymo self-driving car project. FCA so far has invested very little in electrification, preferring to pay Tesla more than 2 billion euros to avoid European Union fines for missing CO2 emissions reduction targets.
FCA still preaches frugality today. The merger proposal submitted to Renault says that broader collaboration through a combination would substantially improve capital efficiency. "The benefits of the proposed transaction are not predicated on plant closures but would be achieved through more capital efficient investment in common global vehicle platforms, architectures, powertrains and technologies."
FCA's 2018-2022 business plan promised a total of 45 billion euros in capital expenditure, of which 9 billion would be invested in electrification. A merger with Renault, which is a leader in battery-powered cars with models such as the Zoe small hatchback, would enable significant savings. In this industry and at this historical juncture, though, you can be frugal only up to a point.
FCA's position in Europe is weak also because of years of underinvestment in new models and technologies, including its premium brands Alfa Romeo and Maserati. FCA's plants in Europe are running at well under 50 percent of their capacity. The merger proposal to Renault says there will be no factory closures, but to stay open, FCA must invest in new models.
Does FCA hope the money to fund investments for Italy's factories will come from France?