The relationship between debt levels and total shareholder return of JSE-listed platinum companies

Abstract

Investors make investment decisions based on their risk appetite. Furthermore, when such investors consider shares as part of their investment portfolio, these investors will consider the risk profile of the company it is interested in. By taking on a certain level of risk, shareholders expect to be commensurately compensated. Shareholders of companies with relatively higher debt levels in their capital structure and therefore higher financial risk, require a relatively higher return on their investment in order to compensate for such additional risk taken. Shareholders expect return in the form of dividend pay-outs, and capital growth in the share price. A positive correlation is therefore expected between the debt levels of a company and the total return to their shareholders, i.e. the sum of the dividend pay-outs and the capital growth in the share price, also referred to as total shareholder return (TSR). The focus of this study is on the platinum industry in South Africa, as this industry is vital to the South African economy in terms of job creation and earner of foreign exchange as South Africa dominates the world production of platinum. The purpose of this study is to investigate whether there is a correlation between the debt levels and the total shareholder return (TSR) of platinum companies listed on the JSE Ltd. Quantitative research techniques were used to address the research problem, making use of secondary data and rank correlation-based research. Firstly, the debt-to-equity ratio for each company was calculated based on book values. Secondly, the TSR of each company was calculated considering the dividends received and capital growth in share price. The correlation between the TSR and the debt-to-equity ratio was determined using Spearman’s rank correlation coefficient. The results were inconclusive, i.e. no, negative and positive relationships where the relationship is for the first 12 years not significant and for the last two years significant. Therefore the final conclusion is that this study is inconclusive to support or to reject the conceptual scope of the study in that risk is concomitant to return, i.e. returns compensate for risks, therefore higher debt levels require higher total shareholder returns (and vice versa). This study contributes to the literature on capital structure decisions from a South African platinum company perspective. The core audience will be the management of South African platinum companies considering changes in their capital structure as well as investors considering investing into a listed platinum company.