Capitalised Dividend valuation: FY2017 Aus Perspective
Quote:
Originally Posted by
Snoopy
The following is a record of all of the dividend payments over the last five years from a New Zealand perspective. 'From a New Zealand perspective' means that the investor concerned can take advantage of New Zealand imputation credits.
Payment Date |
Dividend Imputation Percentage |
Declared Dividend |
Gross Dividend (I/C adjusted) |
17-03-2017 |
0% |
10.0cps |
10.0cps |
16-09-2016 |
50% |
10.5cps |
12.54cps |
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|
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|
|
16-03-2016 |
0% |
10.5cps |
10.5cps |
02-10-2015 |
33% |
10.0cps |
11.0cps |
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|
|
|
|
|
|
|
02-04-2015 |
0% |
10.0cps |
10.0cps |
03-10-2014 |
100% |
10.0cps |
13.89cps |
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|
|
|
|
|
|
|
04-04-2014 |
0% |
10.0cps |
10.0cps |
04-10-2013 |
100% |
10.0cps |
13.89ps |
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|
|
|
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|
|
05-04-2013 |
50% |
10.0cps |
11.94cps |
05-10-2012 |
60% |
8.0cps |
9.87cps |
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|
|
|
|
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|
|
Five Year Average |
|
19.8cps |
22.73cps |
Assuming a required rate of return of 6.5%, this translates to a share price of:
$0.2273 / 0.065 = $3.50
This is a 'business cycle average' valuation. My rule of thumb is that under different market conditions, the share price is liable to fluctuate up to 20% above and down to 20% below 'fair value'. This implies an 'all the ducks lining up' top of the market valuation of $4.20 cum dividend. At a $4.25 close on the market on Friday, but with a dividend payment of some 10c due within a couple of months, SKC is looking very fully priced using this valuation technique. Perhaps reducing one's holding on any market strength from here is the way to go?
The following is a record of all of the dividend payments over the last five years from an Australian perspective. 'From an Australian perspective' means that the investor concerned can take advantage of Australian franking credits. Despite being from an Australian perspective, I have expressed all dollar values in NZ dollars to facilitate easier comparison with the NZ perspective case.
Payment Date |
Dividend Franking Percentage |
Declared Dividend |
Gross Dividend (F/C adjusted) |
17-03-2017 |
0% |
10.0cps |
10.0cps |
16-09-2016 |
0% |
10.5cps |
10.5cps |
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|
|
|
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|
|
|
16-03-2016 |
0% |
10.5cps |
10.5cps |
02-10-2015 |
0% |
10.0cps |
10.0cps |
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|
|
|
|
|
|
02-04-2015 |
25% |
10.0cps |
11.07cps |
03-10-2014 |
0% |
10.0cps |
10.0cps |
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|
|
|
|
|
|
04-04-2014 |
100% |
10.0cps |
14.29cps |
04-10-2013 |
0% |
10.0cps |
10.0ps |
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|
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|
05-04-2013 |
50% |
10.0cps |
12.14cps |
05-10-2012 |
60% |
8.0cps |
10.06cps |
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|
|
|
|
|
|
|
Five Year Average |
|
19.8cps |
21.71cps |
Assuming a required rate of return of 6.25%, this translates to a share price of:
$0.2171 / 0.0625 = $3.47
(Note that I have reduced the acceptable return to 6.25% -Aus perspective - from 6.5% (NZ Perspective). This takes into account the reserve bank cash rate being 1.5% in Australia, 0.25% less than the 1.75% in New Zealand.)
This is quite an interesting result, because it shows the value of SKC to the NZ or Aus dividend hound is more or less the same!
SNOOPY
The Imputation & Franking Credit Conundrum: Part 1
Quote:
Originally Posted by
Snoopy
This is quite an interesting result, because it shows the value of SKC to the NZ or Aus dividend hound is more or less the same!
Now that we have considered dividends from both the NZ and Oz perspective, it is time to combine the two.
A bit of background: Imputation Credits are an NZ Market creation to ensure that shareholders, the owners of the company, only pay tax on their share of company income once. An 'imputed dividend' means that an NZ shareholder can take credit for any company paid tax that the company in which they own shares has already paid on their behalf. An 'unimputed dividend' means the company has not paid tax on that dividend. So it is up to the shareholder to pay the tax on their 'dividend income' themselves.
There is an exactly analogous system operation in the Australian market called 'Franking Credits'. However, the NZ Inland Revenue does not recognize Australian franking credits and vica versa. This poses a bit of a dilemma for companies that operate with scale on both sides of the Tasman. They have to balance the interests of both NZ investors and Australian investors by doing some 'mixing and matching' as to where they declare their profits. By 'mixing and matching' I am referring to the the practice of transfer pricing. The location of some company costs are optional. And where the company chooses to incur these costs influences the relative profitability on each side of the Tasman.
One reflection of where a company allocates their costs can be seen in whether dividends are either 'imputed' or 'franked'. Income is never franked and imputed, because that would mean paying tax on the same income twice in both countries and no responsible management would allow that to happen. So the balance between franked and imputed income, as reflected through dividends paid from that income, is of interest to shareholders. The amount of imputing or franking for each dividend declared over the last five years I have listed in the table below.
Payment Date |
Dividend Imputation Percentage |
Dividend Franked Percentage |
Imputed + Franked Percentage |
05-10-2012 |
60% |
60% |
120% |
05-04-2013 |
50% |
50% |
100% |
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04-10-2013 |
100% |
0% |
100% |
04-04-2014 |
0% |
100% |
100% |
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|
03-10-2014 |
100% |
0% |
100% |
02-04-2015 |
0% |
25% |
25% |
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|
|
02-10-2015 |
33% |
0% |
33% |
16-03-2016 |
0% |
0% |
0% |
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|
|
16-09-2016 |
50% |
0% |
50% |
17-03-2017 |
0% |
0% |
0% |
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|
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|
|
|
A couple of 'discussion points' arise from this table.
SNOOPY
The Imputation & Franking Credit Conundrum: Part 2
Quote:
Originally Posted by
Snoopy
Payment Date |
Dividend Imputation Percentage |
Dividend Franked Percentage |
Imputed + Franked Percentage |
05-10-2012 |
60% |
60% |
120% |
A couple of 'discussion points' arise from this table.
How is it possible to pay out 'credits' that amount to more than 100% of dividend income, as per the dividend declared on 05-10-2012? We have to remember that a company earns imputation credits on all of its income. If a company does not pay out all of their income as dividends, then imputation credits (and I presume franking credits), can accumulate inside the company. So it is likely this 'over payment of credits' was accomplished by using imputation stockpiled from previous years or even the current year (assuming 100% of earning were not paid out of dividends in the current period).
The other way a company can pay out imputation (and franking?) credits that they have not earned is to pay some income tax coming due in advance.
I am not sure which explanation applies here. But paying out more than 100% of income credits available on income is not as inexplicable as it seems at a casual glance.
SNOOPY
Honing in on the missing credits
Quote:
Originally Posted by
Snoopy
Payment Date |
Dividend Imputation Percentage |
Dividend Franked Percentage |
Imputed + Franked Percentage |
17-03-2017 |
0% |
0% |
0% |
16-09-2016 |
50% |
0% |
50% |
|
|
|
|
|
|
|
|
16-03-2016 |
0% |
0% |
0% |
02-10-2015 |
33% |
0% |
33% |
A couple of 'discussion points' arise from this table.
Quote:
Originally Posted by
Snoopy
|
Prima Facie Income tax @ 28% |
Actual Legal Income Tax Expense |
Cashflow Statement Tax paid |
Imputation Credits Paid: D1/D2 |
FY2016 |
$55.235m |
$51.597m |
$13.062m |
33%/0% |
FY2015 |
$47.840m |
$42.114m |
$29.059m |
100%/0% |
The 'actual legal income tax expense' is less than the 28% corporate rate, because certain expenses are not tax deductable.
'D1' refers to the first dividend paid in the financial year under scrutiny (actually the 'final dividend' from the previous year).
'D2' refers to the second dividend paid in the financial year under scrutiny (actually the 'interim dividend' for the current financial year).
For both FY2015: $29.059m / $47.840m = 61% and
FY2016: $13.062m / $55.235m = 24%
the actual cash paid over both FY2015 and FY2016 shows not enough tax credits have been paid during the year to pay, in combination at least, a fully imputed and/or a fully franked dividend over FY2016. (remember dividend policy is to pay out on only 80% of earnings).
Yet if we look at the actual dividends paid over FY2016, there were just 33% (higher than the 24% actually paid) dividend imputation credits or franking credits paid on the first dividend of that financial year (02-10-2015), and no imputation or franking credits paid at all on the second dividend paid on 16-03-2016.
Something very unusual is going on here.
So we are left with a real mystery. Why has a supposedly amply capitalised SKC, not handed over the cash to the respective Australian and New Zealand tax departments, certainly enough tax paid to 100% impute/frank those dividends declared over FY2016?
SNOOPY