Why PROSY's Dividend Sustainability is Under Threat and What Investors Should Do

Investors in Prosus (PROSY) face a critical crossroads. While the company's recent 100% dividend hike to €0.20 per share and its first-ever positive free cash flow (excluding Tencent dividends) signal optimism, underlying financial metrics and market risks suggest this dividend may not be sustainable long-term. This article dissects Prosus's financial health, identifies red flags, and outlines actionable steps for investors to protect their portfolios.

The Dividend Hike: Cause for Celebration or Concern?

Prosus's decision to double its dividend is undeniably bold. The move is backed by a US$513 million free cash flow improvement in FY2025 and a robust cash balance of US$18.9 billion. However, this optimism overlooks critical vulnerabilities:

1. Debt Levels and Rising Leverage:
   Prosus's total debt stands at US$16.35 billion, with a debt-to-equity ratio of 32%—up sharply from 12.5% five years ago. While its cash reserves exceed debt today, the trend of increasing leverage raises questions about future borrowing costs.
   

2. Negative Interest Coverage:
   Prosus's interest coverage ratio of -0.5x reveals that its interest expenses outstripped EBIT. This is a stark warning: even with ample cash, a prolonged decline in earnings or rise in borrowing costs could destabilize debt servicing.

3. Dividend Payout Ratio Risks:
   While not explicitly stated, the 100% dividend increase likely strains Prosus's payout ratio. If free cash flow (excluding Tencent) remains volatile, sustaining this dividend could force deeper cuts into critical investments or reserves.

Cash Flow: A Fragile Foundation

Prosus's free cash flow turnaround is a positive sign, but it's still nascent. Key divisions like iFood and OLX drove Adjusted EBIT growth, but Payments & Fintech posted losses (e.g., PayU's US$11 million deficit). This uneven performance suggests cash flow could remain inconsistent, especially as Prosus invests heavily in acquisitions like Just Eat Takeaway.com (US$7.8 billion).

Market Risks Compounding the Threat

1. Acquisition-Driven Growth:
   Prosus's strategy hinges on integrating acquisitions like Just Eat and Despegar into its ecosystem. Execution risks here are high: integration costs, regulatory hurdles, and market saturation could drain cash reserves.

2. Global Economic Pressures:
   Prosus operates in competitive markets (e.g., e-commerce, fintech) where macroeconomic slowdowns could suppress revenue growth. Its exposure to regions like Southeast Asia and Europe amplifies this risk.

3. Tencent's Shadow:
   While not part of Prosus's core operations, Tencent's valuation indirectly influences investor sentiment. A decline in Tencent's stock could indirectly pressure Prosus's perceived value and cash flow assumptions.

Investment Recommendations: Act Now, Hedge Later

The data paints a clear picture: Prosus's dividend is under threat unless it stabilizes debt growth and maintains robust free cash flow. Investors should act decisively:

1. Trim Exposure Gradually:
   Reduce Prosus holdings by 20-30% to limit downside risk. Use stop-loss orders at key support levels (e.g., 10% below current price) to mitigate losses if the dividend is cut or cash flow falters.

2. Diversify into Defensive Dividend Plays:
   Shift capital to dividend stocks with stronger balance sheets and lower leverage ratios. Examples include Microsoft (MSFT) or Coca-Cola (KO), which offer stable cash flows and disciplined capital allocation.

3. Monitor Key Metrics:
   Track Prosus's quarterly interest coverage ratio and free cash flow. A sustained drop below US$400 million in free cash flow or a debt-to-equity ratio exceeding 40% should trigger further reductions.

Conclusion: Prudent Caution Over Aggressive Optimism

Prosus's dividend hike is a double-edged sword. While cash reserves provide short-term comfort, rising debt, execution risks, and uneven cash flow growth make long-term sustainability uncertain. Investors must prioritize downside protection now—waiting for clearer signs of stability could come at a steep cost.

Disclosure: This analysis is for informational purposes only and not personalized financial advice. Investors should conduct their own research or consult a financial advisor before making decisions.