- Banco Macro is one of the largest banks in Argentina.
- A dividend of ARS 16,580 million has already been approved and an additional ARS 10,000 million are to be approved next month.
- Altogether, this ARS 26,580 million represents a 21.1% dividend yield at current prices.
- Here is the catch: Argentina's Central Bank currently does not allow financial institutions to distribute dividends. But this temporary restriction must end sometime.
- We will be focusing mainly on the pending dividends and understanding the Central Bank's current restrictions. Also, I will be giving you some context to today's market situation in Argentina.
Banco Macro (NYSE:BMA) is one of the largest banks in Argentina and is currently trading at - what I think are - attractive prices, after plummeting 90% in the last three years during one of the longest and harshest bear markets in record.
Last year, the annual shareholders' meeting considered 2019's results and approved a dividend of ARS 12,780 million. The payment was kept on hold due to current restrictions from the Central Bank of Argentina (BCRA) that temporarily does not allow financial institutions to distribute dividends for reasons we will be explaining in detail later. This figure was later increased to ARS 16,580 million to account for inflation.
Next month, the annual shareholders' meeting is considering to approve a new ARS 10,000 million dividend that would add up to the already approved ARS 16,580 million, totaling ARS 26,580 million which in turn represents a 21.1% return at current prices.
Restrictions from the Central Bank holding back the payment of this dividend cannot last forever. In this article, we will be mainly focusing on the dividends itself and understanding BCRA's restrictions and how long can they last. We will not be valuing the company. However, we will be contemplating current prices through technical analysis for some market context specially aimed to foreign investors.
Banco Macro Headquarters. Source: Pelli Clarke Pelli Architects.
A Quick Technical Overview
Let me start by giving you some context. Banco Macro has plummeted more than 90% from the 2017's all-time highs, returning to the same lows of the 2012 crisis.
Source: author, using tradingview.com
This behavior is not restricted only to BMA, but it is instead the norm for almost all argentine equity. Here you can see a 25-year-long graph of the Merval Index (MERVAL) in USD, adjusted by inflation. Average historical price is shown in red.
Source: Twitter @camilocr3
The duration and depth of this particular crisis is worth noting. It has arguably been the worst bear market since the country's 2001 collapse.
This last graph pretty much summarizes everything. Argentina has not created any real value consistently for at least the last 25 years. It has been submerged in cyclical crisis, one after the other, for many decades now, with its Merval Index fluctuating around the USD 750 mark. But this does not mean we cannot make huge amounts of money by investing in this market.
About Argentine Stock Market
First of all, that the set of companies that comprises the whole economy - or the Merval index for that matter - have not grown over time does not necessarily imply that none of them has. Some of these companies have experimented tremendous growth over the years, but this has been simply offset by the declination of others. In other words, you can make a lot of money in this market but you must bet on the right horse. This, to be fair, is not that different than any other stock market in the world with the main difference being that the size of the cake in Argentina's case has not increased for many decades now, but the different slices do change in size.
The other way to making money in this volatile and complex market is by just having good timing. Buy in one of the many crisis the country faces periodically and sell when the economy normalizes (well, sort of normalizes). When the argentine stock market rallies it outperforms any other stock market in the world... by a lot. Take a look at 2003 or 2013 in the graph above if you do not believe my word, or take a look at this article from 2017 when the Merval Index rallied 77% in only one year. Of course, buying at the lows and selling high is easier said than done but then again the same criterion applies for making money in any other market in the world.
Now we all agree that argentine market is riskier than others. In a highly unpredictable country such as Argentina were rules change constantly, things can go south very quickly. Probably one of the best examples I can give you is the expropriation of YPF where no matter how good your analysis was, a political decision made it all go to waste in a blink of an eye. To be fair, this is probably an extreme case to be used as an example, but you do not need an expropriation for an investment thesis to fail completely. It can fail with much less than that: simply change a few regulations here and there. In Argentina, that happens all the time.
My point here is that Argentina certainly has a riskier more volatile nature than other markets, but this can be used in our favor if we understand the country and its cycles. More volatility can mean higher returns in shorter times.
Three Years of Bear Market
The 2018-2021 bear market is - in my view - mainly explained by three key events:
- A financial crisis initiated in 2018, triggered by the loss of confidence in the gov't actions to improve the macroeconomics of the country and that ultimately led to a default and a bailout from the IMF.
- Former President Mauricio Macri losing the 2019 election to Peronism - a more leftist party - that led to a brutal devaluation the day after the election and the biggest crash in the stock market ever recorded, with most stocks plummeting up to 50% in one single day.
- Finally, the covid-19 pandemic hitting hard on a country already economically weakened and struggling in the middle of a recession.
There are many reasons to believe we have already seen the worse of this crisis and the bear market may already be over. Argentina has already successfully restructured its sovereign debt and is currently seeking to secure a better deal with the IMF. I believe there are big chances of this deal going forward, since the country simply cannot pay back on due time the USD 45,000+ million it owes the IMF. There is no way around it. This in turn would allow a better deal with the Paris Club as well. Also, gov't seems to have been successful in stabilizing the currency after years of constant and rapid devaluations (though we must say it did so through strict controls and constant market interventions). Commodities are soaring too, boosting argentine agricultural exports, and a much needed USD 4,000+ million in SDRs from the IMF are on their way.
Moreover, midterm elections are coming later this year and could act as a catalyst for a new bull market. This is precisely what happened back in 2013 when Peronism made a poor election setting off a five-year-long bull market. I still remember watching stocks rallying 200%, 300%, up to 400% in USD terms in a matter of months (see graph below for an example). Maybe that can happen again now, who knows. As we have already seen, we are trading at 2012 prices (even 2001 prices or lower in some cases) and many stocks I have already covered in other articles in Seeking Alpha are clearly undervalued and could easily experience this kind of rallies. See for example IRSA Commercial Properties: High Dividend Real Estate Company With Premium Assets or Pampa Energia: A Bet On Vaca Muerta With +300% Upside. Moreover, today's crisis have many similarities to that of 2012, including the very same capital controls. Again, Argentina is very cyclical.
Pampa Energía's (PAM) 2013-2014 rally. Stock price soared 300% in one year. In 2017 the company was trading at USD 72 per ADR and had rallied 2,300% since the 2012 all-time lows. Source: author, using TradingView.
However, there are many reasons to be skeptic too. Argentina's inflation is by no means under control yet and Central Bank's foreign reserves are worryingly low. We will be discussing this in more detail later on, but you can also refer to this excellent written article for Seeking Alpha by Harrison Schwartz for a deeper look into this problematic, particularly what inflation means for Banco Macro.
Here is an unpopular opinion regarding this last paragraph: if you want to be the one who buys the stock in the all-time lows, you must know that you will be buying it when everything looks terribly bad and a way out of the crisis is not clear at all. That is when these kind of valuations occur. There is simply no way around that. Who would have bet on Argentina during the 2001 collapse when there was literally blood in the streets? Nobody. There seemed to be no way out of that one. However, USD 5,000 invested in say GGAL during that time would have turned to USD 1,200,000 in the fifteen years after. And this is not even accounting for dividends...
A Quick Glance at Banco Macro's Metrics
Unfortunately, undercovered stocks such as Banco Macro tend to have its ratios completely outdated in almost every platform I have looked. I thought, then, that it would be a good idea to dedicate just a few lines to presenting those numbers here for convenience.
Banco Macro is currently composed of 639 million outstanding shares, or 63.9 million ADRs. It trades at "Bolsas y Mercados de Argentina" (BYMA) and NYSE at a price of ARS 197 per share or USD 13.18 per ADR. This represents a market capitalization of USD 840 million.
Book Value (BV) at the end of 2020 amounted to USD 840 million, so P/BV sits at 1x. It is important to notice that this BV already takes into account the dividends approved during 2020 (we will talk about this later on), otherwise P/BV would sit below 0.9x.
The 2020's results show a profit of ARS 25,300 million, only 5% lower than 2019's when adjusted by inflation. P/E ratio sits then at 5x.
For more information, you can take a look at the 2020's results at Seeking Alpha here.
Central Bank Restrictions on Dividends Distribution
The Central Bank of the Republic of Argentina establishes the general procedure for financial institutions to distribute its earnings. According to that procedure, earnings may only be distributed if certain circumstances are met. You can read more about this in Banco Macro's earnings report for 3Q 2020 (page 58).
Today, the country is facing two main challenges that leads the BCRA to restrict companies' access to foreign currency and restrain dividend payments.
- Central bank's liquid reserves are almost non-existent. To preserve its liquid reserves, BCRA has tightened its controls and limited access to them to both individuals and companies. In the case of the latter, BCRA is only allowing them to buy up to 40% of the total amount required to face their debt obligations, compulsory making them roll-over the other 60% to avoid a default. Just for you know, we have seen this happening many times already.
- The covid-19 pandemic. On March 19, 2020, through Decree No. 297/2020, the Government established the "social, preventive and compulsory isolation" to minimize the spread of the covid-19 virus like many other countries did. Many health protection rules, tax and financial measures were taken to mitigate the covid-19 impact on the economy, including public direct financial assistance measures for part of the population and the establishment of financial and fiscal facilities for both individuals and companies. The BCRA also established maturities extensions, froze the mortgage loan installments and encouraged banks to lend to companies at reduced rates. In addition, the BCRA issued its Communiqué "A" 6939 informing that the distribution of dividends of the finance institutions was suspended until December 31, 2020. This is therefore interpreted mostly as a measure to strengthen the bank's balance sheet to be able to face the economic turmoil due to the pandemic.
Regarding this last point, there are three official communications that we must consider. These are:
Communiqué "A" 6939
Published on March 19, 2020, it forbids the distribution of dividends to all banks until June 30, 2020. You can find this document here.
Communiqué "A" 7035
It was published on June 4, 2020, extending the prohibition to all financial institution to pay dividends until December 31, 2020. See here.
Communiqué "A" 7181
Published on December 17, 2020, it extended once more the prohibition to pay dividends until June 30, 2021. See here, point 4.
Therefore, at the time of writing, banks are forbidden to pay dividends until June 30, 2021.
About Banco Macro's Dividends
Let me tell you exactly how the story of Banco Macro's pending dividends unfolded and how we reached a 21.1% pending dividend.
On March 10th, 2020, the annual report for the 2019 fiscal year was published with a positive net result of ARS 25,300 million. In it, the Board of Directors anticipated it was summiting a motion for consideration at the next Shareholders' Meeting recommending the distribution of dividends in cash on the amount of ARS 12,788,268,160 or ARS 20 per share (remember, shares trades today at ARS 197 at BYMA). You can find this information in the 2019 Annual Report, page 171. Later that day, the proposal was formalized here, and approved at the annual Shareholders' Meeting on the 30th of April.
Unfortunately, on March 19th the BCRA's Communiqué 6939 had been published forbidding all financial institutions to distribute dividends, so the company had no choice but to halt the payment.
On the 31st of August, Banco Macro calls for a new shareholders' meeting to revise the amount to be paid, proposing a new complementary dividend.
Consideration of a complementary dividend in order to increase the amount of the cash dividend approved by the Ordinary and Extraordinary General Meeting of April 30, 2020, which is pending distribution as a result of the prior authorization of the Central Bank of the Argentine Republic. Setting the parameters to specify their amount and delegation to the Board of the effective making available to the shareholders.
You can read this communication here.
The Shareholders' Meeting held on October 21, 2020, resolved to distribute a supplementary cash dividend to be calculated by multiplying the original dividend of ARS 20 per share already approved by the Shareholders' Meeting held on April 30 2020, by the coefficient obtained after dividing the most recent Consumer Price Index (CPI) published by the Argentine Institute of Statistics and Censuses (INDEC, for its acronym in Spanish) and informed by such entity to the date on which the BCRA issues its authorization for the payment, by the CPI for the month of April 2020. The aggregate amount to be distributed for this purpose could not exceed the amount of ARS 3,791,721,509.
In other words, it was approved to adjust the dividend by inflation for up to an additional ARS 3,791,721,509. This is a +29.65% at maximum from the dividend originally proposed.
Source: Consumer Price Index, INDEC.
As shown above, IPC shows a composed increment of 34% from April 2020 to February 2021, surpassing the 29.65% by which the original dividend could be adjusted by. Therefore, today's pending dividend amounts to ARS 16,579,989,679. At the current market cap of ARS 125,900 million (639 million common shares trading at ARS 197 each) this represents a dividend of 13.1%.
But wait, there is more.
On March 10th 2021, the annual report for the 2020 fiscal year was published.
On March 17th, the Board of Directors proposed a new dividend in a communication to the market here.
To distribute as a dividend in cash or in kind, in this case valued at market price, or in any combination of both options, the sum of ARS 15.64 per share, which would yield a total amount to be distributed of ARS 10,000,425,701.12, [...] through the partial cancellation of the Optional Reserve for Future Distribution of Results whose amount as of December 31, 2020 [...] amounts to $ 70,446,357,678.11, and delegate to the Board of Directors the determination of the manner, conditions and date of the effective making available to the shareholders.
The shareholders' annual meeting will take place on the 30th of April. See here.
If approved, the ARS 10,000 million will be added to the already approved dividend of ARS 16,580 million making a total pending dividend of ARS 26,580 million. At current prices, this represents a dividend yield of 21.1%.
It is interesting to notice that Banco Macro is paying an 8% dividend for the 2020's results. Given that 2020 has been a terrible year by everyone's standards, that BMA is paying such a high yield is certainly a good indication. Prices must indeed be really low to account for this high yield.
Pay attention to the communication again. It makes clear that the dividend could be paid in kind, if the Board of Directors choose to do so. That is something we must keep in mind. A dividend in kind can sound less attractive, but has better chances of being approved to be paid earlier.
BCRA's restrictions on dividend payments end on June 30, 2021. I believe (and this is of course my personal opinion) that conditions to remove these restrictions are not here yet and BCRA will opt to extend them once more, probably until December 31 2021. Here, I believe, chances are much favorable for a complete ending of these restrictions or at least to be a little more flexible with them. By then, elections would have already taken place, a deal with the IMF should have already been secured improving sovereign bond prices significantly, a significant amount of the population will have already been vaccinated and covid-19 pandemic should be slowly being left behind. A lot can change in the coming nine months.
By this time, we may also be encountering a new dividend proposal for the 2021 results. If that is the case, if the new dividend proposal is somewhat similar to 2020's, pending dividends could be already nearing 30%. This would mean we could be now buying one of the largest banks in Argentina at what seems to be attractive prices (we have not really done any real valuation here) and getting 30% of our money back in one year. Crazy.
Of course, this is just conjecture at this point.
Other possibility I see is the company paying the 2020 dividend in kind. That sounds less attractive than good old cash but it could be approved earlier, which would be really good news and a catalyst for the share price. Plus, the 2019 dividend would be still be pending awaiting approval to be paid in cash.
In any case, it is important that Banco Macro adjusts its pending dividends by inflation. As we have seen inflation in Argentina is not negligible, to say the least. Or, if you are a foreign investor, you may want to keep an eye on the USD/ARS exchange rate.
All in all, I believe the combination of massive dividends and an attractive share price overall surpasses the risks we have discussed so far. We have seen there are many aspects of Argentina macroeconomics yet to be resolved, but they seem to be already all priced-in. Moreover, the country seems to be on the right path despite having to deal with the covid-19 pandemic in the meantime (successful restructuring of the sovereign debt being the best example). I believe a deal with the IMF and the upcoming elections are going to be the main catalysts for the market in general. In particular, BCRA lifting its current regulations on dividend payments can be a huge catalyst for Banco Macro.
This article was written by
Analyst’s Disclosure: I am/we are long BMA, PAM, IRCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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