SKL is paying over 4% - at this price.. cheap as chips .. its the market. They will be bringing back there Euros and Pounds..
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SKL is paying over 4% - at this price.. cheap as chips .. its the market. They will be bringing back there Euros and Pounds..
The above is how I have previously dealt with this issue as regards Skellerup. The other way is to take advantage of our knowledge that says:
1/ the way to convert an unimputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by one (that is a complicated mathematical way of saying that with no imputation credits a 'net dividend' and a 'gross dividend' are the same thing).
2/ the way to convert a fully imputed 'net dividend' to a 'gross dividend' is to divide the 'net dividend' by 'one minus the company tax rate' (1-0.28) which is 0.72.
Partially imputed dividends are calculated using a divisor that is between the two extremes of '1' and '0.72'. If you think of the distance between the two extremes as 28 steps, then exactly half way between (50% imputation) is 14 steps. That corresponds to a divisor of: 1-0.14= 0.86
For 55% imputation we are going to end up closer to full imputation than the 50% imputation case. The number of steps we have to cover is 0.55x28=15.4. 1-0.154= 0.846
So using this method on the gross dividends I have calculated above
FY2019 P1/ 7.0c (55% imputed) = 7.0c/0.846 = = 8.27c (gross dividend)
FY2019 P2/ 5.5c (50% imputed) = 5.5c/0.86 = = 6.40c (gross dividend)
FY2020 P1/ 7.5c (50% imputed) = 7.5c/0.86 = 8.72c (gross dividend)
FY2020 P2/ 5.5c (50% imputed) = 5.5c/0.86 = 6.40c (gross dividend)
These answers should be identical with the answers I used in my alternative calculation method in my quote bubble above, but they are not. Can anyone explain the difference?
SNOOPY
Why would you think that?
With a declared dividend of N imputed to a percent P then the Tax T always is (at the current corporate tax rate of 28%):
T = N * P/100 * 0.28 / 0.72
and the gross dividend G is
G = N + T
Just us that formula and trust me, I am not an accountant ;)
Ok Snow Leopard, Let's tax the latest 5.5c dividend and apply your tax calculation formula:
T = N * P/100 * 0.28 / 0.72 = 5.5c * 50/100 * 0.28/0.72 = 1.07c
Now work out the gross dividend
G = N + T = 5.5c + 1.07c = 6.57c
Now compare that to my first effort below
and you will see that we both have the same answer. But is it the right answer?Quote:
FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)
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I want to introduce the algebraic entity 'TD' for 'Tax divisor', I am defining this as the number you must divide into the Net Profit to get the gross profit. For a fully imputed dividend TD =0.72. For an unimputed dividend TD = 1
T = G-N = N/TD - N = N( 1/TD - TD ) = N (1-TD)/TD = N *(0.28/0.72) for a fully imputed dividend.
Now compare that to your formula SN for a 100% imputed dividend
T = N * P/100 * 0.28 / 0.72 = N *100/100 * 0.28/0.72 = N *(0.28/0.72)
So for 100% imputation we get the same answer. This is getting promising. We have now agreed twice within the same post!
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But look what happens when we change the imputation rate to only 50%, which equates to 'TD =0.86'
T = G-N = N/TD - N = N( 1/TD - TD ) = N (1-TD)/TD = N *(0.14/0.86) for a 50% imputed dividend.
Now compare that to your tax formula SN for a 50% imputed dividend
T = N * P/100 * 0.28 / 0.72 = N *50/100 * 0.28/0.72 = N *(0.14/0.72)
and you will see that we no longer agree. So which is the right approach?
SNOOPY
Snoopy
The formula I provided is ALWAYS correct.
Here is the information from my March 19th 2020 dividend statement, normalised down to one share:
Payment Rate 5.5000c less Withholding Tax 1.0985c equals Net Dividend 4.4015c NZ Imputation Credits 1.0694c Withholding Tax 1.0985c Gross Dividend 6.5694c
Using the SN formula for calculating imputation credits
T = N * P/100 * 0.28 / 0.72 = 5.5c * 50/100 * (0.28 /0.72) = 1.0694c
This is the same imputation figure printed on my dividend statement. So it looks like the SN formula is consistent with the information that Computershare is giving me.
SNOOPY
remark removed.
I still don't get the derivation of the above formula. However, given it has the Snow Leopard 'black spot' of approval, and the answers line up with the dividend statements coming out of Computershare, I will carry on with it.
Tax isn't such an issue from a Skellerup management perspective. They invest in different centres all over the world, manufacture in different centres all over the world, and pay tax in different jurisdictions all over the world. The problem is that our Inland Revenue department only recognises imputation credits on that part of the profit generated in New Zealand. If we shareholders get a part of dividend from profits earned offshore, then that part of the profit is 'double taxed' in our hands. By this I mean that if Skellerup profit is earned in the United States (as an example) it will be tax in the United States. But if that U.S. profit is passed on to resident New Zealand shareholders, then that bit of the profit that as already been will be taxed again by order of the New Zealand government as if no prior tax has been paid.
The partially imputed dividends that have suffered from this effect, I requote in the bubble below:
The imputed tax bill of each of these dividends is as follows:
FY2019 P1/ 7.0c (55% imputed) = 7.0c * 55/100 * 0.28 / 0.72 = 1.50c
FY2019 P2/ 5.5c (50% imputed) = 5.5c * 50/100 * 0.28 / 0.72 = 1.07c
FY2020 P1/ 7.5c (50% imputed) = 7.5c * 50/100 * 0.28 / 0.72 =1.46c
FY2020 P2/ 5.5c (50% imputed) = 5.5c * 50/100 * 0.28 / 0.72 = 1.07c
A New Zealand shareholder on a 28% tax rate (e.g. an NZ Company investing in Skellerup) will have the following total tax deducted from their respective dividends:.
FY2019 P1/ 7.0c (55% imputed) = 8.5c * 0.28 = 2.38c
FY2019 P2/ 5.5c (50% imputed) = 6.57c * 0.28 = 1.83c
FY2020 P1/ 7.5c (50% imputed) = 8.96c * 0.28 = 2.51c
FY2020 P2/ 5.5c (50% imputed) = 6.57c * 0.28 = 1.83c
So the extra tax levelled on NZ shareholders, due to the dividend not being fully imputed, was:
NZ Shareholder Tax less Imputed Tax equals Additional NZ Resident Tax FY2019 P1: 7.0c (55% imputed) 2.38c 1.50c 0.88c FY2019 P2: 5.5c (50% imputed) 1.83c 1.07c 0.76c FY2020 P1: 7.5c (50% imputed) 2.51c 1.46c 1.05c FY2020 P2: 5.5c (50% imputed) 1.83c 1.07c 0.76c
For a 50% imputed dividend, the Additional NZ resident tax amounts to 14% of the net declared dividend.
SNOOPY
The last time Skellerup qualified for this kind of analysis was FY2014, incorporating the previous five year perspective that went with this date. There were three crucial parameters involved in the modeling which I have quoted above. For the FY2020 edition of the Buffett growth model, I have recalculated these parameters as below.
FY2016 FY2017 FY2018 FY2019 FY2020 Average New Wigram factory opens Nexus Foams (NZ) & 35% of SimLim (USA) Silclear (UK) Return on Shareholder Equity 14.7% 12.3% 15.2% 16.4% 15.6% 15.0% (rounded up from 14.8%) Dividend Payout Ratio 92% 88% 71% 83% 87% 84% PE Ratio at 30th September 11.5 16.6 15.7 15.2 19.9 15.8
The dividend payout ratio is based on the dividends actually paid out in the financial year under question - normally the final dividend for the previous year and the interim dividend for the current year, (not the dividends declared relating to the results of that year).
The number of previous years that I use to generate my data is a judgement call. Last time I used nine years of data. The more years of data that you use, the better longer term picture you get. But over time a business evolves. So the longer series of data may be less representative of the business today, and going forwards. And it is the future that is of most interest when we are making future projections. FY2016 marked the start of a 'new era' for Skellerup. I quote from the Chairman's address in the FY2016 Annual Report.
"The FY16 year included a number of notable milestones. The most significant is the completion of the of the base build of our new facility at Wigram which has enabled us to commence the careful and gradual relocation of our Agri business from Woolston to Wigram."
"Another notable milestone has been the growth we have achieved in international markets."
So this time I have elected to use my 'minimum period' of just five years, to keep my Return on Equity, Dividend Payout Ratio and market rated PE position most relevant.
Some financial analysts might see the idea of a 10 year projection forwards as absurdly unreliable, because so much can happen in that time. Buffett argues that for a special subset of businesses, that have strong internal fundamentals, it is actually easier to predict where that business will be in ten years than two. In two years any short term shock might hit. But over the much longer time period of 10 years, the underlying competitive advantage of this select group of businesses that can pass the Buffett tests are unlikely to be derailed.
SNOOPY
I think Ggcc's post #870 helps explain why the market is prepared to pay above the average PE of 15.6 ie 19.7.It is certainly not based on eps growth.
'The market however is factoring in negative interest rates that are set to arrive in the coming years. SKL still gives a better return than banks give in a term deposit. Of course no guarantee this will continue of course.'
No guarantees...., I agree. No matter where one looks there are risks and no guarantees.
Even money in the bank could evaporate in the event of a bank failure. Being well diversified has served us well through the current market issues. I am anticipating further issues next year and hold sufficient cash to "see us through" (hopefully).
Disc: Long Time Holder and topped up at 182
Nothing I have done so far has confirmed the case for investment in Skellerup. A excellent company can still be a lousy investment if the price you pay for access is too high. So is the price for Skellerup today on the market too high? To answer that I plug the modelling numbers that I have generated into the Buffett style ten year growth model.
For this model I am using:
a/ an ROE of 15.0% (the actual average of the last 5 years) AND
b/ a dividend payout ratio of 84% (the actual dividend payout of the last 5 years).
I have noted that the dividend going forwards is likely to be 50% imputed. The reason why the Skellerup dividend is only 50% imputed is that 50% of profits are now generated overseas. This tax matter has no real bearing on the operational performance of Skellerup. But from an investor perspective, this means extra tax (at a rate of 28%) must be deducted from half of all future dividends, compared to if an equivalent fully imputed dividend was to be paid. I have adjusted for this in my calculation table by including an extra tax deduction (assuming all dividends going forwards are 50% imputed, 50% non-imputed).
SOFY FY Asset Backing Operations Earnings add OCI (*) less Dividend equals Retained Earnings Unimputed Dividend Tax 2020 (historical) 0.916 0.150 0.011 0.130 0.031 (0.018) 2021 0.948 0.142 0.120 0.022 (0.017) 2022 0.970 0.146 0.123 0.023 (0.017) 2023 0.993 0.149 0.125 0.024 (0.018) 2024 1.017 0.153 0.129 0.024 (0.018) 2025 1.041 0.156 0.131 0.025 (0.018) 2026 1.066 0.160 0.134 0.026 (0.019) 2027 1.092 0.164 0.138 0.026 (0.019) 2028 1.118 0.168 0.141 0.027 (0.020) 2029 1.145 0.171 0.144 0.027 (0.020) 2030 1.172 0.176 0.148 0.028 (0.021) 2031 1.200 0.180 Ten Year Total 1.333 (0.205)
(*) OCI = 'Other Comprehensive Income' (hedging and foreign currency adjustments)
With FY2031 projected earnings of 18.0cps, and using a PE ratio of 15.6 (actual average over the last 5 years), the expected share price for Skellerup in ten years time is:
15.6 x 0.18 = $2.84
The net dividend return for shareholders over that time is $1.333 - $0.205 = $1.128 (as per above table)
Using a market share price today of $2.95, the expected compounding annual return 'i' can be calculated from the following equation.
$2.95(1+i)^10 = (2.84 +1.13) => i=3.01%
This projected 3.01% return is a net return per year. The equivalent gross return is 3.01%/0.72 = 4.18%. While this kind of return looks attractive, compared with term deposit interest rates under 2%, I don't believe it is sufficient for Warren to be interested in buying into Skellerup. What we have here is a very good company, but one that is what I would term 'fully priced'. The fact that I am predicting the share price in ten years time ($2.84) to be slightly lower than the share price today ($2.95), despite solid incremental operational growth says it all.
What Skellerup share price (P) would Warren need to buy at to get his much touted 15% compounding return per year?
P(1+0.15)^10 = (2.84+1.13) => P= 98.1c
SNOOPY
Snoopy there is very little or nothing around that meets the Buffet criteria. I do some screening with adapted "softer" criteria and it has served me well. The average cost of my current Skellerup holdings is c. 103c per share. Were I to have sold at the end of August price; return including all dividends and realised capital gain would have been close to 20% pa compounding according to my bookkeeping software. I'm happy to have owned this investment for quite some time but if I'd strictly applied Buffet criteria it would likely have kept me out of this investment.
Hi GlennJ; Holding an investment in Skellerup at an average price at $1.03 is a great result: Well done! I present my work on Skellerup as tool you can use however you like. Not a lesson from the pulpit on what to do. Ultimately it would be fantastic to plug into an investment that gave a 15% compounding return. But as you have noted, the chances of finding such an investment is slim. I don't see that as a reason not to do the work though. You can lower your standards a bit and be happy with a return of 'only' 12% compounding, for example. That is what I did when I did the exercise below in 2014
I have been accumulating SKL since and my average entry price is $1.33. Not as good a price as you achieved but I can't complain. I didn't wait for the share price to drop to $1.08 which would have seen me miss out. With the impressive rally since Covid-19, SKL is now my largest NZX holding, which is another -personal- reason to up the work I am doing on Skellerup. As well as telling investors when the time might be to buy, a Buffett style analysis can also tell you when it might be time to sell down. I don't think we are at the sell down point yet, But it will pay to keep an eye on things going forwards.
SNOOPY
I have had a quiet look at the FY2020 annual report that arrived in my mailbox on Friday. I have done a Buffett style evaluation and found the company to be at best fairly valued. So for a different perspective, what does the announcement of the October 2020 dividend payment do for valuing the company based on capitalised payments?
I have updated my valuation using the latest five years of 'rolling data'. FY2019 was been the first year that dividends have not been fully imputed, and it looks like given the multinational production strategy, this will be the case forever into the future. Granted, the dividends have been increased, which means that dividend hungry shareholders are not worse off in dollars paid out terms. As Liz Coutts highlights in the Chairman's address:
"While much of our product development and design is done in New Zealand, more than three quarters of our products are manufactured overseas"
The calculations to work out the equivalent gross figure for FY2019's, FY2020s and FY2021s unimputed dividends, those actually paid in the FY2019, FY2020 and FY2021 financial years, are as follows:
FY2019 P1/ 7.0c (55% imputed) = 3.85c (FI) + 3.15c (NI) = 3.85c/0.72 +3.15c = 5.35c +3.15c = 8.50c (gross dividend)
FY2019 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)
FY2020 P1/ 7.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)
FY2020 P2/ 5.5c (50% imputed) = 2.75c (FI) + 2.75c (NI) = 2.75c/0.72 +2.75c = 3.82c +2.75c = 6.57c (gross dividend)
FY2021 P1/ 5.5c (50% imputed) = 3.75c (FI) + 3.75c (NI) = 3.75c/0.72 +3.75c = 5.21c +3.75c = 8.96c (gross dividend)
Year Dividends as Declared Gross Dividends Gross Dividend Total FY2016 5.5c+3.5c N/Ac + 4.86c 4.86c FY2017 5.5c+3.5c 7.64c + 4.86c 12.50c FY2018 6.0c+4.0c 8.33c + 5.56c 13.89c FY2019 7.0c (55% I) +5.5c (50% I) 8.50c +6.57c 15.07c FY2020 7.5c (50% I) + 5.5c (50% I) 8.96c + 6.57c 15.53c FY2021 7.5c (50% I) + ?c (50% I) 8.96c + ?c 8.96c Total 70.81c
Averaged over 5 years, the dividend works out at 70.81/5 = 14.2c (gross dividend).
I have given some thought as to whether I should revise my sought for "gross yield" in this new environment of very low interest rates. I think that given the trade wars and the inability of Skellerup to quickly move production from affected international production sites, I should not do this.
So based on my previously selected sought after 7.5% gross yield over an historic five year business cycle window, , 'fair value' for SKL is:
14.2 / (0.075) = $1.89
Now using my plus and minus 20% range to get a feel how the SKL share price might behave at the top and bottom of its business cycle.
Top of Business Cycle Valuation: $1.89 x 1.2 = $2.27
Bottom of Business Cycle Valuation: $1.89 x 0.8 = $1.51
My target accumulation price is 10% below 'fair value', and that equates to $1.70.
SKL shares are trading at $2.94 as I write this (well above the upper end of my expected valuation range) and as such are now overvalued by at least 30%. An alternative way of looking at this result is to say 'forget dividend capitalisation' and accept that there is now a 'growth premium' built into the share price. That means that the Buffett style valuation model is the best way to look at the true value of SKL going forwards.
SNOOPY
discl: hold SKL