Mercury Energy has a policy of paying out dividends based on cashflow. The following table is based on 1,400m share on issue.
| Financial Year |
Declared NPAT |
Net Operating Cashflow |
eps |
Implied tax from Year's Operations |
Stay in Business CAPEX |
Free Cashflow per Share (by definition adjusted for Stay in Business CAPEX) |
dps |
Imputed Tax Credit |
Imputed Tax Balance SOFY |
Tax Paid Over Financial Year |
|---|
| 2013 |
|
|
|
|
|
|
|
|
0c |
|
| 2014 |
$212m |
$317m |
15.3c |
6.0c |
$60m |
22.6c-4.3c= 18.3c |
12.4c |
4.8c |
2.3c |
6.3c |
| 2015 |
$47m |
$329m |
3.4c |
1.3c |
$79m |
22.1c-5.6c= 16.5c |
18.9c |
7.4c |
3.3c |
5.6c |
| 2016 |
$160m |
$280m |
11.6c |
4.4c |
$60m |
20.0c-4.3c= 15.7c |
16.6c |
6.5c |
1.1c |
6.4c |
| 2017 |
|
|
|
|
|
|
|
|
0c |
?c |
| Total |
|
|
30.3c |
11.7c |
|
40.5c |
47.9c |
18.7c |
|
18.3c |
You can see in the above table that 'free cashflow per share' and 'dividend' are indeed closely matched. Over the period shown in the table (note that I have omitted the partially imputed dividend just paid out in early FY2017) all dividends paid to shareholders have been fully imputed.
I have shown the imputed tax credits on the books at the start of each year. This figure is of course 'topped up' by any tax paid during the year. So showing the tax credits on account at the start of the year is not really that useful as a stand alone figure. But it is useful in that it can show 'intent'. Why would you pay taxes in advance of paying shareholders (for that is what having a positive imputation balance means) unless you did intend to either:
a/ Use retained earnings for reinvestment (off the table as the major capital investment is done) OR
b/ Pay those imputaion credits through to shareholders down the track?
On 30th June 2016 ( =SOFY2017) the imputation credit balance for MCY has effectively been reduced to zero (actually there is a small positive balance, which when translated to 'per share' figures rounds down to zero). My contention is that this is an indicator that managment are not too worried about declaring fully imputed dividends from here on in.
If you look again at the table you can see that for each of the years FY2014, FY2015 and FY2016:
1/the 'imputed tax balance' at the start of the financial year PLUS
2/ the 'tax paid over the year'
exceeds the 'imputed tax credit' attached to the dividend of that year. This means that all of the dividends paid over FY2014, FY2015 and FY2016 could be paid as 'fully imputed dividends'.
Interestingly the 'implied tax due' from actual profits declared over FY2014-FY2016 (11.7cps) is rather less than the actual tax paid over FY2014 to FY2016 (18.3cps). My interpretation of that is that the company deliberately planned to overpay tax to create what in effect were 'fake imputation credits' to make the prospectus projected yields look better than they really were. If you pay tax without a tax liability then in latter years you can pay less tax than required, to bring your tax bill into balance and everything is hunky dory and legal. Nevertheless I would contend that the shareholder who invested assuming these fully imputed dividends would continue have been deceived. Not by Mercury, as all the information showing that such high fully imputed dividends could not be paid out indefinitely was there in the prospectus if you looked. Instead, shareholders were deceived by their own greed, that caused them not to look!
The final dividend for FY2016, paid in FY2017 and not shown on the table, was 8.6c imputed and 4c
unimputed. The 8.6c imputed means that, so far, MCY has paid
8.6/0.72 -8.6 = 3.3 cps
in tax to the IRD subsequent to the publishing of their annual result and the payment of the first dividend in the current financial year. But the fact that MCY declared in tandem an
unimputed 4cps dividend means that the previously calculated 3.3cps in tax is all that has been paid (so far). It also strongly implies that there is no intention for the company to
ever pay tax on this 4c unimputed dividend. Finally the reason MCY will not pay tax on this 4c is that it isn't really profit at all. If it was profit, there would be a company tax liability. Since there is no profit, my contention is that this 4c 'unimputed dividend' is equivalent to a 4c return of capital, but with a tax bill added to be paid at the shareholder level. Now I personally have no problem paying my fair share of taxes. But is giving me some of my 'already owned' assets back, really a benefit to me that should be taxed?
Is paying that unimputed dividend prudent treatment of shareholders by the MCY directors?
SNOOPY
discl: hold MCY
Originally Posted by RTM
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