Decreasing Shareholder Wealth (Lesson 1): Borrow to pay the dividend
Quote:
Originally Posted by
Snoopy
What is alarming is that the bank overdraft of over $6m is being used with an effective average interest rate of 11.40% (AR2014 Note 29f). Now that really is high!
Money borrowed is tax deductable. That means the after tax interest rate paid on overdraft by SCT is:
0.72 x 11.4% = 8.2%
At a share price of $1.70, SCT is on an FY2014 dividend yield of:
(2.5c+5.5c)/170 = 4.7% (net, after tax)
So the cost of paying you, an SCT shareholder, an annual dividend of 9c, will decrease your share of SCTs cash balance by (8.2/4.7) x 9c = 15.7c.
Shareholders get their 9c dividend in their bank account (great to have that in the right pocket), but to do that SCT have had to pull 15.7c out of you left pocket. Great eh?
SNOOPY