Spark certainly is one for the 'dividend hounds'. I haven't yet written the summary conclusion to my Buffett tests. But it is clear the background conditions to run the so called "Buffett Spreadsheet' to value Spark will not be fulfilled. This means we need to apply alternative valuation techniques. My standard 'go to' alternative method is 'capitalised dividend valuation'. This is capitalising the average dividend paid over the last five years.
To reprise, -because I haven't done this for a while- 'capitalising the dividend' is actually a fairly crude method of valuation. Implicit is the assumption that the company is 'no growth', and that the performance of the last five years will be reflective of company performance in the current year. Of special mention in this case is that Spark dividends have been consistently greater than underlying earnings. One way to think of this is that directors, who have more up to date and comprehensive knowledge of Spark than we shareholders do, are optimistic that underlying business will improve. IOW we shareholders are benefitting from director 'insider knowledge'. Another benefit of capitalised dividend valuation is that it does not require anyone to forecast any dividend payouts from the company. So there is no forecasting error. All the figures I use in the valuation are based on dividends actually paid
Gross Dividend Calculations
FY2017 P2:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 80.6% imputed):
= 11.0c (FI) + 1.209c (FI) + 0.291c (NI) = 11.0c/0.72 + 1.209c/0.72 +0.291c =
17.25c (gross dividend)
FY2018 P1:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 75% imputed):
= 11.0c (FI) + 1.125c (FI) + 0.375c (NI) = 11.0c/0.72 + 1.125c/0.72 + 0.375c =
17.22c (gross dividend)
FY2018 P2, FY2019 P1, FY2019 P2, and FY2020 P1 (All 75% imputed): 11.0c (ordinary) + 1.5c (ordinary) = 12.5c (total)
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c =
16.15c (gross dividend)
FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c =
16.15c (gross dividend)
FY2021 P1, FY2021 P2, FY2022 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c =
17.36c (gross dividend)
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2017 |
12.5c+12.5c |
N/Ac + 17.25c |
17.25c |
FY2018 |
12.5c+12.5c |
17.22c + 16.15c |
33.37c |
FY2019 |
12.5c +12.5c |
16.15c +16.15c |
32.30c |
FY2020 |
12.5c + 12.5c |
16.15c + 16.15c |
32.30c |
FY2021 |
12.5c + 12.5c |
17.36c + 17.36c |
34.72c |
FY2022 |
12.5c + ?c |
17.36c + ?c |
17.36c |
Total |
|
|
167.3c |
Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus. But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6% gross interest return on your shares bought would be fair. The five year historical average gross dividend received by shareholders from Spark was:
167.3 / 5 = 33.46c
The capitalised dividend value of Spark (fair value) is therefore: 33.46c/0.06 = $5.58
Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.58 x 0.9 = $5.02.
I have been buying SPK cum that 12.5c fully imputed dividend today!