MEL - Meridian Energy

[Harvey Specter]

xafalcon, what you say about the immediate realisation of a return is correct. But all remaining shareholders do benefit from the buyback. Beacuse as shares are bought back and cancelled, that means the profit in the future will be shared out between a smaller number of shares that remain on issue IOW eps increases for those shareholders that remain. And that means should a remaining shareholder decide to sell at a later date he/she should get a higher price than they otherwise would have, because of the buy back.

SNOOPY

I understand the theory of buy-backs being better than special dividends. But the theory cannot be proven one way or the other - there is no "control group" against which to compare the 2 options.

A buyback is only good for remaining shareholders if they shares are purchased at a discount to intrinsic value (is that the term Buffet uses?). If above that, it is a transfer of wealth to those who sell from those who hold.

[boysy]

Thoughts on the results ?

[sb9]

Thoughts on the results ?

Divvies keep flowing....

[bull....]

Thoughts on the results ?

nice steady ship

[Joshuatree]

Yeah, in fact most results so far showing Corporate NZ doing well

[Snoopy]

I understand the theory of buy-backs being better than special dividends. But the theory cannot be proven one way or the other - there is no "control group" against which to compare the 2 options.

With respect xafalcon, if Contact buys back:
"up to 25 million ordinary shares for an aggregate purchase price of up to NZ$100 million"

that means that the most shares Contact can buy is 25 million at $4 each. Now we know that Contact has always paid more than $4. So by inference they will not be able to buy as many as 25m shares. But just to keep things simple for this example (because the actual number of shares bought back is yet unknown and currently unknowable), let's say they did manage to buy back 25m shares.

Before the buyback 733,358,872 shares were on issue. After the buyback that means there will be:

733,358,872 - 25,000,000 = 708,358,872 shares left

The number of shares cancelled amount to:

25m/733m = 3.4% of the total.

However, the company has the same underlying assets and liabilities that are now apportioned out between fewer shares. So the underlying value of each remaining share must rise by 3.4%

3.4% x $5.07 (closing price on 15th October, when buyback announced) = 17c, once the buyback has fully concluded.

This is not a theory. It is a mathematical fact, and the increase in underlying value of the shares you have left cannot be disputed.

Now if we go to the market, there are many influences on the CEN share price. Because the share price has moved by a lot more than 17c, even though the buyback is not yet complete, these other factors are more than outweighing the effect of the buyback. But that doesn't mean the buyback will not increase the underlying value of the share by 17c.

The slight increase in regular dividends as a result of cancellation of 0.001% (hypothetical example) of shares on issue is so tiny it is inconsequential.

Straw man. Cancelling 3.4% of shares on issue is not inconsequential.

So it comes down to the increase in SP (less brokerage required to realise the gain in SP) v's a special dividend (less any tax liability). If shares aren't sold immediately, interest (or other investment returns) must also be factored.

The buyback is an event over several months. The 17c total share value change should accrue over those months. But the daily actual underlying value change depends on the number of shares bought back. The shares bought back are not announced until after they have been bought back. So you can't reduce the number of shares you hold as the buyback progresses, because you don't know in advance when those shares are going to be bought back. The buy back is not a one day event. So it is not possible to sell all the shares you want to sell 'immediately' to compensate.

But I also can't prove that special dividends are the better option. However an old saying springs to mind "a bird in hand is worth two in the bush"

The special dividend is a bird in the hand. The underlying increase in share value is also a bird in the hand if you choose to sell the number of shares needed to compensate.

But I have watched MRP and CEN work through buy-backs. With the SP falling part way through the buy-backs, which goes against the theory. IMO market sentiment was a much more powerful force. Hence my preference for a special dividend

What you have watched is other factors on the market affecting the value of the shares. You implication that all other influences on the share price will stop just because a buyback is in place is not realistic.

SNOOPY

[Snow Leopard]

...The number of shares cancelled amount to:

25m/733m = 3.4% of the total.

However, the company has the same underlying assets and liabilities that are now apportioned out between fewer shares. So the underlying value of each remaining share must rise by 3.4%
...

Actually there is $100M less equity in the form of, effectively, more borrowings (and thus an ongoing interest payable liability).

Best Wishes
Paper Tiger

[Snoopy]

Actually there is $100M less equity in the form of, effectively, more borrowings (and thus an ongoing interest payable liability).

Best Wishes
Paper Tiger

Quite correct PT. But adjusting for that will not affect the basic argument that I am outlining.
I probably should have said the "same underlying business", rather than the wording I used to make my point more clearly.

SNOOPY

[xafalcon]

And with respect to you Snoopy.

You are mixing underlying value with market value

Underlying value is the theory behind a buy-back being better, and I don't dispute the theory. The maths works out every time

Market value is what someone is prepared to pay for a share at a point in time. It is not a 1:1 relationship with underlying value. The two can be and often are totally disconnected. This is a fact that is demonstrated by the market in every transaction

Now you can always sell your share(s) at market value and spend the money on whatever you want. But you can't always sell your share(s) at their underlying value. This is also a fact that cannot be disputed

Through the buy-back the market value of CEN decreased from 500 to 450 while the underlying value has increased.

So was the buy-back a success? Hard to say definitively, but it feels pretty poor to me

SP has decreased by approx. 10% and a 13.6cps special dividend was not dished out

Market forces have totally swamped the buy-back effect. Same thing happened with MRP.

This is why I would take the special dividend every time. In this example 13.6cps is 13.6cps, it comes in a cheque that can be spent on whatever whenever, and isn't subject to unpredictable market forces

The inconsequential increase in dividends (based on interim & final F15) is 26cps x 3.4% = 0.88cps extra annual dividend. Under $100 on a hypothetical $50k investment held for a year. Peanuts (a pun, just for you Snoopy)

[GTM 3442]

Yes, but I think the falcon's point was that a buy-back doesn't provide the immediate benefit - cash in the pocket - that a dividend does. I would add that it sometimes becomes difficult to appreciate that a buy-back has really had a beneficial effect on the shareprice, due to the influence of other, especially market, causes/conditions.

Spare a thought for all those loyal Blackberry shareholders who hung on through the repeated buy-backs, to be left with. . . . nothing.

Personally, if my company has spare cash washing about, I'd much rather they gave it to me.