Business Cycle Valuation 2014
Quote:
Originally Posted by
Snoopy
Hope I haven't blown the faith US. Here is another angle on valuing SCT, based on dividend payments alone.
It is not an easy job to value a share with a patchy earnings history. As a long-term investor I am always interested in the dividend yield over the business cycle as a return that is very tangible. In mom and pop investor terms, this is the cash in bank account received by the long-term investor.
I favour looking at ten years of operating result history. This is a compromise between averaging out over the business cycle and dropping payments from so long ago that they are no longer indicative of today.
For Scott Technology, I have added together all of the dividends paid in each current financial year ended 31st August. In annual terms from FY2011 looking backwards the dividends paid out were as follows:
6.0, 1.8, 0, 4.4, 4.4, 0, 9.5, 10.2, 8.5, 2.9
That comes out to a grand total of 47.7cps over ten years. I should note that the per-share earnings have been retrospectively adjusted to reflect the number of shares on issue today. Significant changes in the number of shares without the addition of any cash earning business unit were as follows:
1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
3/ A 1:8 bonus issue on 4th December 2003
4/ A 1:8 bonus issue on 8th December 2002
Assume a Scott Technology share price of $1.65, and an average annual over the business cycle cash payout of 4.77cps
4.77c/$1.65= 2.89% net = 4.1% gross
That compares favourably with term deposit rates in this current low interest rate environment. Therefore I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline for any less than $1.65, for no improvement in cash return. For me $1.65 has become the bottom line indicative price that I would consider selling at.
Scott Technology is unusual on the NZX: A high technology company that makes a profit and pays a good dividend. Notice I said ‘makes a profit’ not ‘makes a consistent’ profit. Despite diversification over the last seven years, Scott Technology has a patchy earnings and an inconsistent dividend record.
My favoured way to look at a company with ‘inconsistent dividends’ is to try and take an overview over a full business cycle. I choose ten years as a reasonable full business cycle to consider.
Starting with the December 2010 full year dividend, shareholders have had the option of participating in a dividend reinvestment plan. This has increased the liquidity of shares and incrementally increased the capital of the company. But it also has had the effect of diluting earnings per share. Because we live in 2014, I find it necessary to discount prior year dividends per share to take account of this. Also taken into account are:
1/ A 1:4 rights issue on 4th August 2011
2/ A 1:10 bonus issue on 26th March 2010
In tabulated form my adjusted dividend data is calculated as follows:
Financial Year |
Dividend Declared |
Adjustment Factor |
AdjustedDividend |
Rocklabs Addition |
2015(est) |
8.0 |
1.0 |
8.0 |
|
2014 |
10.0 |
41.122/44.009 |
9.3 |
|
2013 |
8.0 |
40.689/44.009 |
7.4 |
|
2012 |
7.0 |
39.721/44.009 |
6.3 |
|
2011 |
5.25 |
31.322/44.009 |
3.4 |
|
2010 |
1.00 |
28.475/44.009 |
0.6 |
|
2009 |
0.00 |
N/A |
0.00 |
|
2008 |
9.00 |
24.964/44.009 |
5.1 |
0.16 |
2007 |
0.00 |
N/A |
0.00 |
0.16 |
2006 |
4.0 |
24.964/44.009 |
2.3 |
0.16 |
Total |
|
|
42.4 |
0.48 |
That comes out to a grand total of 42.9cps over ten years.
4.29c/0.7= 6.1cps (gross)
6.1c/$1.65= 3.9% gross
That compares favourably with term deposit rates in this current “low interest rate” environment. Therefore, I can’t see the sense in selling your SCT shares and decoupling yourself from the potential of the long term investment pipeline. The earnings of the automated milking system and even the meat industry robotics are not reflected in the earnings/dividends that I have quoted. Think of SCT as a bank debenture quantum interest return, complete with a series of free lottery tickets in the emerging technologies I have described. That’s why I believe SCT is –still- the best technology investment on the NZX
SNOOPY