MCY Mercury NZ ( MRP Mighty River Power)

[Aaron]

I think their debt is 1.1 billion.Massive enough for me.So in effect borrowing to pay dividends.
Why not pay it off, rather than suffer interest costs on this; dead money.
I know people talk about debt/equity ratio being OK, but is it really good debt??, or just backdoor cashflow for the Govt.
I am involved in a small private company which had debt; various business type shareholders advised paying dividends while in debt, mumbling about debt/equity ratios, I objected and was over-ruled marginally by a vote, but I note the policy was actually changed by fiat by the Directors so no dividends were paid for 5 years, debt was eliminated and the share price has gone through the roof and we now have dividends, and capital for an ambitious expansion, and when interest rates rise one day we won't be nervous.
Once a week in the Herald in the business news the ratio of dividends/earnings is published, and that's where I got the figure from.

I don't disagree with you on paying down debt as debt equals risk but if you read my post below you will see it can be argued dividends were paid from operating cashflow and borrowings were to partly cover new investment. The argument would be that the new investment will generate returns in excess of the interest rate on debt and possibly the dividend return on equity. This looks like bull**** when you go back to the overseas investments MRP wrote off prior to being offered to the public. The other argument for debt is that we have central banks worldwide whose policy is to raise the price of everything at least 2%-3% annually. Provided interest rates don't get too far ahead of inflation, inflation will take care of the debt over time. Seems wrong but I think everyone is relying on this to continue.
Another thought although it won't apply to 51% govt owned MRP is that a company's balance sheet is "lazy" if it has too little debt. This argument I am not too sure of so stand to be corrected but in some cases private equity buys the shares as dividends are low and the company is not growing so is not highly valued. They then cut jobs and make stock control more efficient and boosting profits. They then borrow to pay massive dividends from the company to themselves and when the balance sheet is no longer "lazy" (i.e. loaded up with debt) they offer the company back to the public through an IPO usually at a price much larger than they purchased it for. (think MYOB and more recently Dick Smith). Why people buy into these I don't know but good advertising and people wearing sharp suits does work.

[trader_jackson]

I don't disagree with you on paying down debt as debt equals risk but if you read my post below you will see it can be argued dividends were paid from operating cashflow and borrowings were to partly cover new investment. The argument would be that the new investment will generate returns in excess of the interest rate on debt and possibly the dividend return on equity. This looks like bull**** when you go back to the overseas investments MRP wrote off prior to being offered to the public. The other argument for debt is that we have central banks worldwide whose policy is to raise the price of everything at least 2%-3% annually. Provided interest rates don't get too far ahead of inflation, inflation will take care of the debt over time. Seems wrong but I think everyone is relying on this to continue.
Another thought although it won't apply to 51% govt owned MRP is that a company's balance sheet is "lazy" if it has too little debt. This argument I am not too sure of so stand to be corrected but in some cases private equity buys the shares as dividends are low and the company is not growing so is not highly valued. They then cut jobs and make stock control more efficient and boosting profits. They then borrow to pay massive dividends from the company to themselves and when the balance sheet is no longer "lazy" (i.e. loaded up with debt) they offer the company back to the public through an IPO usually at a price much larger than they purchased it for. (think MYOB and more recently Dick Smith). Why people buy into these I don't know but good advertising and people wearing sharp suits does work.

Essentially, it is better to have some debt that what it is not to have debt. This is why MRP has some debt... Financial leverage can increase earnings per share as long as the after tax cost of the debt is less than the return on investing the borrowed money.

[Harvey Specter]

Essentially, it is better to have some debt that what it is not to have debt. This is why MRP has some debt... Financial leverage can increase earnings per share as long as the after tax cost of the debt is less than the return on investing the borrowed money.

Only if that debt is cheap!

Which it is for the power companies.

[winner69]

Essentially, it is better to have some debt that what it is not to have debt. This is why MRP has some debt... Financial leverage can increase earnings per share as long as the after tax cost of the debt is less than the return on investing the borrowed money.

T_j -- I don't think you meant to say what you did, esp the earnings per share bit?

May have completely misinterpreted what you did mean though. If so I'm sorry.

[Snow Leopard]

Essentially, it is better to have some debt that what it is not to have debt. This is why MRP has some debt... Financial leverage can increase earnings per share as long as the after tax cost of the debt is less than the return on investing the borrowed money.

Should MRP,
be debt free,
there would be,
more for me*

[*FY2015 debt of $1,110m with interest payments of $104m eliminated, would have

raised earnings (and ordinary dividends?) by approximately 5.4cps and

raised reported NTA from $2.37 to $3.18.


The use of the word 'me' is for poetic purposes only and should not be construed as an inducement to buy, hold or even sell MRP.]

Best Wishes
Paper Tiger

[winner69]

[*FY2015 debt of $1,110m with interest payments of $104m eliminated, would have

raised earnings (and ordinary dividends?) by approximately 5.4cps and

raised reported NTA from $2.37 to $3.18.

Best Wishes
Paper Tiger

Seems expensive debt they have - interest cost 9.4%

Some $300m of the debt is bonds at 6.9% - the rest must be awfully expensive.

With a ROE of 4.6% and a ROIC of 5.1% one could say debt is not 'bad'

What's their cost of capital? Not adding much, if any, value these days if f15 performance is typical.(returns above are after eliminating the $130m impairment charge)

Disc: know stuff all about those type of companies except this cursory glance at their financials.

[Harvey Specter]

Seems expensive debt they have - interest cost 9.4%

Some $300m of the debt is bonds at 6.9% - the rest must be awfully expensive.

Or old. When that expensive debt expires, they should be able to refinance at under 5%.

[Aaron]

Seems expensive debt they have - interest cost 9.4%

Some $300m of the debt is bonds at 6.9% - the rest must be awfully expensive.

With a ROE of 4.6% and a ROIC of 5.1% one could say debt is not 'bad'

What's their cost of capital?

What is ROIC (I assume return on invested capital or return on assets)
Correct me if I am wrong but with a 5.1% return on assets and interest of 9.4% doesn't that mean any debt is reducing value for shareholders.

As assets are being revalued every year. Should I look at the discount rate used on their DCF model to revalue assets. It all gets confusing for a simple person like myself.

[winner69]

Aaron - ROIC is Return on Invested Capital where Invested Capital is equity (shareholders funds) plus debt. Sometime known as ROCE or Return on Capital Employed.

Some of your comments suggest that you not as 'simple' as you make out. Good to see.

[Crac A Jac]

Sounds like a large amount of dead interest money is going out of the loop into the pockets of the lenders, to no gain to MRP; Nothing to lose by getting rid of debt, except the notion that it is always good to have a debt/equity ratio to talk about, and have dividends to talk about. Cut to the chase see the big picture and increase long term shareholder (Kiwisaver?) wealth rather than work your butt off for the bondholder/banker etc paying interest unnecessarily..
Saying you have a manageable debt to equity ratio is a bit meaningless ;debt is for investment, not dividends.Not just talking MRP, but many/most other companies.
But it seems politically incorrect/ not acceptable to the market to not have dividends, which is a bit irrational.
Think about it though; would you borrow money just to pay yourself??
Taken to the extreme, IIRC Hanover Finance directors paid themselves the entire value of the company leaving it with an infinite debt to equity ratio, worked out real well(for some)...