Originally Posted by
SparkyTheClown
I love a good value play, as posters will know, and I've already indicated in a post a few days ago that I bought into CNU at $2.65 late last week. My reason being that at $2.65 I considered the share "de-risked" from further drops since I believe the market is now factoring in most of the headwinds CNU is facing.
On today's pricing, CNU is on a gross yield of 13.4%. Yes, that's right 13.4%! And even with the worst case ComCom decisions, it will still be able to pay out 13.4% for the next two-three years. This is based on 25.5c in dividends divided by the price of $2.65, then divided by .72 to reflect the gross yield before tax.
But - let us assume the dividend drops to 15c beyond the next two years, which is not an unrealistic assumption if you believe the ComCom will deliver the worst possible result for Chorus.
(15c/$2.65) / .72 = 7.9%
Now, I don't know about you, but a yield of 7.9% in 3-4 years as a worst case sounds like a pretty good outcome.
So let us take this into perspective. A person who buys CNU today for a long term hold who suffers a cut to the dividend in 2015 and beyond can expect this
25.5 + 25.5 + 15 + 15 + 15 = 96c. Divide by 5 and you get an average of 19.2c
19.2c/$2.65 / .72 = an average 10% yield over five years.
Not bad in my opinion. And over five years there is plenty of scope for Chorus to address headwinds like higher than expected build costs and ComCom issues. If people work out that as a five year hold, CNU is perfectly acceptable at an average 8.25% yield, then $3.23 is a fair price.
Of course, there is always the further risk of capital reduction, but as I mentioned above, the price of $2.65 largely de-risks this.