I have had a quiet look at the half year annual report that arrived in my mailbox today. It was a clean result, but not quite enough to lift SKL into a 'must buy for Buffett' type investment. So I am back to valuing the company based on their dividend 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 and FY2020s unimputed dividends, those actually paid in the FY2019 and FY2020 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)
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2016 |
5.5c+3.5c |
7.64c + 4.86c |
12.50c |
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 |
Total |
|
|
69.49c |
Averaged over 5 years, the dividend works out at 69.49/5 = 13.9c (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:
13.9 / (0.075) = $1.85
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: $1.85 x 1.2 = $2.22
Bottom of Business Cycle Valuation: $1.85 x 0.8 = $1.48
My target accumulation price is 10% below 'fair value', and that equates to $1.67.
SKL shares are trading at $1.59 as I write this (in the lower end of my expected valuation range) and as such are now undervalued by 14%. Is that a fair reflection of the company's prospects? Or has the price just been dragged down by general market malaise?
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