Below I present my corrected earnings picture for the last nine years. You will note that:
1/ I have deleted the FY2015 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 80% of free cash flow being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.
Scenario Basis Financial Year |
eps (A) |
Scenario dps (B) |
Difference (A)-(B) |
Divie Capital Component (C) |
Unimputed Tax Bill (D) |
Difference (B)-(C)-(D) |
2009 |
22.2c |
29.0c |
-6.8c |
6.8c |
1.9c |
20.3c |
2010 |
21.4c |
26.0c |
-4.6c |
4.6c |
1.3c |
20.1c |
2011 |
21.8c |
15.0c |
+6.8c |
0c |
0c |
15.0c |
2012 |
24.7c |
30.0c |
-5.9c |
5.9c |
1.7c |
22.4c |
2013 |
28.2c |
32.0c |
-3.8c |
3.8c |
1.1c |
27.1c |
2014 |
27.8c |
36.0c |
-8.2c |
8.2c |
2.3c |
25.5c |
2015 |
22.5c |
37.0c |
-14.5c |
14.5c |
4.1c |
18.4c |
2016 |
22.2c |
35.0c |
-12.8c |
12.8c |
3.6c |
18.6c |
2017 |
18.7c |
32.0c |
-13.3c |
13.3c |
3.7c |
15.0c |
Total |
209.5c |
272.0c |
|
|
|
182.4c |
The expected average dividend per year, net of tax is therefore: 182.4 / 9 = 20.3cps (net)
Using a tax rate of 28c this is equivalent to a gross income of: 20.3cps /(1-0.28) = 28.1c
If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:
28.1/0.06 = $4.69
So $4.69 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern
Readers should note that $4.69 represents 'business cycle neutral' fair value. We could argue that we are currently at the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value.
$4.69 x 1.2 = $5.62
This isn't too far removed from the $5.54 Contact is trading at as I write this post. However, I would suggest that if Contact breaks out of this trading range (towards $6), that might be an appropriate time to look at lightening your shareholding.