Time to look at a ten year scenario analysis. This analysis takes the current dividend policy and looks back to see what level of dividend might have been expected had that policy been in place for all of the last ten years, This involves using actual 'Cashflow from Operational Activity', 'Stay in Business Capital Expenditure' and 'Net Interest Costs'. In my view using as much real data as possible is preferable when investigating these scenarios.
|
FY2011 |
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Cashflows from Operating Activities |
$379m |
$440m |
$469m |
$446m |
$490m |
$556m |
$508m |
$457m |
$466m |
$390m (1) |
less Stay in Business CAPEX |
($180m) |
($98m) |
($116m) |
($46m) |
($63m) |
($87m) |
($116m) |
($78m) |
($60m) |
($52m) |
less Net Interest Costs |
($62m) |
($72m) |
($66m) |
($77m) |
($98m) |
($101m) |
($92m) |
($84m) |
($70m) |
($55m) |
equals Operating Free Cashflow |
$137m |
$270m |
$287m |
$323m |
$329m |
$368m |
$299m |
$295m |
$336m |
$283m |
Operating Free Cashflow (OFC) x 100% |
$137m |
$270m |
$287m |
$323m |
$329m |
$368m |
$299m |
$295m |
$336m |
$283m |
Modelled Dividend per Share (based on 718m shares on issue) |
19cps |
38cps |
40cps |
45cps |
46cps |
51cps |
42cps |
41cps |
47cps |
39cps |
Actual Dividend per Share (based on 100% of OFC payout policy) |
|
|
|
|
|
|
|
|
39cps |
39cps |
EBITDAF-DA-I-T (Normalised NPAT) |
$156m |
$177m |
$202m |
$199m |
$161m |
$159m |
$134m |
$131m |
$175m |
$127m |
Normalised eps (based on 718m shares on issue) |
21.7cps |
24.7cps |
28.1cps |
27.7cps |
22.4cps |
22.1cps |
18.7cps |
18.2cps |
24.3cps |
17.7cps |
The policy to declare dividends of 100% of operating free cashflow (OFC) was announced in AR2018 in time for the Financial Years of 2019 and beyond. So why was only 82% of OFC paid out for FY2019? As explained in the FY2019 investor briefing from August 11th p8, the plan is to pay out 100% of OFC
in a mean hydrological year, further corrected for abnormal plant maintenance requirements and volatile market conditions. So the '100% payout of Operating Free Cashflow' policy is not quite as simple as it sounds. Water inflows over FY2019 were way above average. Water inflows over FY2020 returned nearer to average although not in the way you might expect. From the integrated report for FY2020 p6:
"We also had an unusual hydrology sequence where the Clutha River experienced periods of extremely low inflows and a one in 20 year flood."
So FY2020 is the first year that has produced the dividend payment that the AR2018 announced headline dividend policy promised. If Contact get a year of bad hydrology, will they borrow to make the dividend up to the level previously promised for an average year? That part of the payout 100% of OFC policy is yet to be tested.
I intend to use the above table as 'input information' into my 'capitalised dividend' valuation model, which is one window into what Contact Energy shares might be worth today.
Another point of note is that I am assuming exactly 718m shares were on issue at the end of each year over the last ten years. In fact the number of shares issued varied with share issues and share buybacks. However the purpose of the table is not an historical retrospective. The purpose of the table is to answer the question:
"What would happen if we imposed the weather events and demand from each of the last ten years over the current dividend policy?"
Effectively we are modelling an array of ten possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect. Yet history cannot model future macroeconomic changes, and Chair Robert McDonald delivered this rather ominous warning to shareholders on p5 of Contacts 'Integrated Report' for FY2020.
"It is particularly pleasing to deliver investors the same 39cps annual dividend this year as last year. However as we look forward to a likely period of disruption in the industry, we will need to reconsider the level of future dividends as the status of Tiwai is cemented and mitigations emerge."
The Tiwai Point aluminum smelter, based in Bluff, uses around 13% of New Zealand's generated power. If it were to close, there is not enough Transpower infrastructure reserved to transfer all the surplus power from Contact's Central Otago located Roxburgh and Clyde dams north. So we could see some surplus power go down the dam spillways after August 2021, if Tiwai does indeed close on that date. And that could lead to a permanent rethink on what constitutes an 'average hydrological year', with a consequential negative effect on future Contact Energy dividends.
(1) If all this wasn't complicated enough, it appears the definition of 'Operating Cashflows' has slightly changed between FY2019 and FY2020. If you look in the respective 'Cashflow Statements' for AR2019 and AR2020, you will see that 'Operating Cashflow' for FY2019 is listed as $466m in the former and $401m in the latter. Why the difference? In FY2020 the FY2019 figure has been reduced by a net interest figure of $69m -$4m = $65m. In AR2019 the 'interest paid' is reported in 'Financing cashflows' and the 'interest earned' is reported under 'Investing cashflows'. For consistency I am using the earlier definition of cashflows in the above table, with no interest charges deducted or added. This explains why 'Operating Cashflows' for FY2020 are listed as $390m in my table, but only $341m in the FY2020 Integrated Report.