To do or not to do…Pay a Dividend that is
There has been plenty of discussion about the merits of paying a dividend.
My view is that not paying a dividend would be a mistake, and harmful to the SP.
It is critical in the current economic environment to retain the support of your shareholders. Companies and their shareholders are feeling the impact of the current economic crisis. NZOG and their shareholders are not immune from this.
On the plus side NZOG is still doing well from Tui, with Tapis still around US$47, and total production from Tui likely to exceed 9 mmbl for the year ending 30 June 09. The foreign currency gains from the $US held now exceed NZ$50 m, and may yet grow further, depending on the timing and the amount such funds are drawndown for Kupe and other investments. Pike is causing some grief due to the contagion affect from its problems with the ventilation shaft, and how this may impact on future production and the shipment sold to the Japanese at US$300/t. The quality of PRC's company’s insurance cover will likely be put under the microscope. I hope it survives the test. The PPP share price is starting to move south, but that is important to other shareholders rather than to NZOG. NZOG is after PPP’s cash and Tui. As cash is king at the moment and for the foreseeable future, I am confident that the company recognises the value of that cash, and will be very mindful of its other opportunities. NZOG can bide its time, but whatever happens it is only likely to use cash to acquire PPP if it can get to 90% and compulsorily acquire the remainder to get to 100% ownership, and by implication, the cash held by PPP. A scrip bid is more likely but not on anything like the terms suggested on this site. The terms suggested do not reflect the value of both companies.
If a company is doing well, it needs to share the rewards with its shareholders. Shareholders rely on their returns. They have not invested just for wealth creation. In this environment profits retained are not fully translating (if at all) into the SP. The markets are not functioning as they once may have. It is not acceptable for profits to be retained unless the reasons are compelling and clearly understood by the shareholders. More than ever, NZOG is now seen as a yield stock with growth prospects. Some new investors would have been attracted by this.
NZOG Directors will be making the call on the dividend today, with it announced to the market tomorrow. Any declaration of a dividend can be done with the knowledge of virtually 8 months trading. Payment normally occurs in early April, so the company would have experienced 9 months trading and cashflow. Surely the investment intentions for the next 3 – 4 months are known, or can be determined with confidence regarding how much of the NZ$200m is likely to be required. Kupe cash flows are only 5 months away, and as such provide the ability for the company to continue to pay consistent dividends that it initiated this time last year.
As I write this, I do it with the NZOG's SP tanking, sitting at $1.18 and looking very weak, and with the conviction that the Directors need to reward the faith and support of their shareholders, and for the Directors to do whatever they can to support the SP in the short to medium term.
In my view, a dividend must be maintained.