Contact with their '80%-100% of Free Operating Cashflow' looks, in practice, to be paying dividends towards the bottom of their indicated range. I believe this is because the policy was based on 'averaged hydro-logical conditions'. If the inflows were above average (which they were in FY2019), then the dividend was not increased. My modelled future dividend scenario is that dividends will be capped at 37cps (This reflects the period after Tauhara has been commissioned remember). Over FY2022 dividends paid during that period amounted to 35cps.
I continue to use my model based on just the last four years of operations.
1/ The 'Scenario 'Dividend Per Share' and 'Scenario Earnings Per Share' columns (from my post 2198) represent a prediction of an ongoing dividend of 80% of free cash flow being paid into the foreseeable future, but now capped at 37cps.
The FY2021 actual dividend payment, under the same policy of paying out 80-100% of free cashflow, was 35cps. This is somewhat less than my four forecast scenarios where dividends are 37cps. But these scenarios reflect a future where Tauhara is operational which should provide an incremental boost to Contact's profitability. I do not consider the modelled dividend payout to be unrepresentatively high, once Tauhara is up and running.
2/ 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 (Column (D).
3/ The capital component of the dividend (Column C) 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.
4/ The unimputed component tax bill (Column D), represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax bill from the value calculated in Column C is assumed. Note that if the (A)-(B) difference were to be positive then there would be no extra tax bill. That's because in such a year, the dividend would be 'fully imputed'.
5/ The final 'Difference Column' represents the 'effective' net dividend per share, adjusted for any extra tax obligation from paying tax on unimputed distributions.
Scenario Basis Financial Year |
eps (A) |
Scenario dps (B) |
Difference (A)-(B) |
Divie Capital Component (C) |
Unimputed Tax Bill (D) |
Difference (B)-(C)-(D) |
2018 |
21.8c |
37.0c |
-15.2c |
15.2c |
4.3c |
17.5c |
2019 |
27.3c |
37.0c |
-9.7c |
9.7c |
2.7c |
24.6c |
2020 |
21.3c |
37.0c |
-15.7c |
15.7c |
4.4c |
16.9c |
2021 |
28.3c |
37.0c |
-8.7c |
8.7c |
2.4c |
25.9c |
Total |
98.7c (E) |
148.0c (F) |
|
|
|
84.9c |
Business Cycle Imputation Rate (E)/(F) |
|
66.69% |
|
|
|
|
.
The expected average dividend per year, net of tax is therefore: 84.9 / 4 = 21.2cps (net)
Using a tax rate of 28c this is equivalent to a gross income of: 21.2cps /(1-0.28) = 29.4cps
Now we come to a critical point in this analysis - the choosing of an 'indicative interest rate' that allows us to value Contact on the basis of being an ongoing income stream.