SPK- Spark NZ (TELCO)

[Snoopy]

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A 'nil imputation credit balance' means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the three year period following EOFY2020, what fully imputed dividends were paid out?

Dividends Paid FY2021 & FY2022	Gross Dividend	Net Dividend	Imputation Credits
Second HY dividend FY2020	$319.4m	$230m	$89.4m
First HY dividend FY2021	$320.8m	$231m	$89.8m
Second HY dividend FY2021	$323.6m	$233m	$90.6m
First HY dividend FY2022	$325.0m	$234m	$91.0m
Second HY dividend FY2022	$325.0m	$234m	$91.0m
First HY dividend FY2023	$325.0m	$234m	$91.0m
Total			$542.8m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



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Now, how does that $542.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Income Tax paid over FY2023	$190m
Imputation Credit Balance Owing EOFY2023	$32m	(See AR2023, p131)
Total	$570m

This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $32m of imputation credits owing! But the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year (30th June) , and the Spark tax financial year that ends 9 months later (31st of March of the following year). That means the unpaid imputation credit balance of $32m is actually an accounting construct, caused by Spark choosing to put a line under their year at the end of 30th June, while the same $32m is a bill 'not yet due' from an IRD perspective.

There is a reported deficit on income tax credits, - which is odd in itself as I was under the impression that income tax credits could not be issued to shareholders until the underlying tax bill was paid (does this mean that the negative imputation credit balance as at 30th June was brought up to zero 'and then some' ($32m+$91m= $123m) before the payment of the final dividend in October, despite the negative imputation credit balance payment not being required to be paid by the IRD until 31st March the following year? - I guess it does!) So does all of this line up with the income tax payments expected to the IRD as reported to the half year ended 31st December 2022 (EOHY2023)? 'Kind of' - the half year cashflow statement shows income tax payments to the IRD of $120m over that period. That means the income tax payment by the final dividend payment date looks to have been $3m shy.

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at their balance date of 30-06-2020" (AR2020 p94, confirmed in AR2021 p101)

A 'nil imputation credit balance' @30-06-2020 means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the period following EOFY2020, what fully imputed dividends were paid out? We can find this information under financial note 4.5 in the respective annual report(s) titled "Equity and Dividends."

Dividends Paid FY2021 & FY2022 & FY2023	Gross Dividend	Net Dividend	Imputation Credits	Declared HY Net Earnings
Second HY dividend FY2020 (12.5cps)	$319.4m	$230m	$89.4m	$147m
First HY dividend FY2021 (12.5cps)	$320.8m	$231m	$89.8m	$234m
Second HY dividend FY2021 (12.5cps)	$323.6m	$233m	$90.6m	$179m
First HY dividend FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$231m
Second HY dividend FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$165m (2)
First HY dividend FY2023 (13.5cps)	$350.0m	$252m	$98.0m	$298m (3)
Sub Total		$1,414m	$549.8m	$1,254m
Second HY dividend FY2023 (13.5cps)	$345.8m	$249m	$96.8m	$157m
Sub Total		$1,663m	$646.6m	$1,411m
First HY dividend FY2024 (13.5cps)	$340.3m	$245m	$95.3m	$?m
Total		$1,908m	$741.9m	$?m

Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend
Note that the first dividend shown in the above table, paid on 20th October 2020 was fully imputed, as have been all dividends since.

2/ Normalised profit calculation for FY2023 HYR2023 Note 5: $837m-$584m+$52m-$140m=$165m

3/ For FY2023, I have removed from the declared profit, one off transactions to create an estimate of the ongoing 'operating profit'. Specifically my adjustments were:
3i/ The $583m one off net gain on the sale of Spark's majority interest in Connexa, the mobile phone tower holding company, was subtracted (AR2023 p95).
3ii/ The subsequent revaluation upwards of the Spark stake in Connexa following the 'Connexa 2 degrees' transaction (a $5m gain in an invested entity valuation) was subtracted (AR2023 p94).
3iii/ One off costs associated with the selling down of Spark's share of Connexa, totalling $30m, were added back.
"$26m for the costs associated with the assets disposed of in the sale of Connexa, $2m for the unwinding of a deferred tax asset associated with the Connexa transaction and $2m of current tax adjustment for the Spark Sport provision. (AR2023 p130 under sub note 1 (under 'income tax expense' header).
3iv/ The $54m loss on the closing of Spark Sport was added back (AR2023 p94).
3v/ Tax effect of Connexa sale, Spark Sport write down and the subsequent dilution effect from the 2 degrees towers being folded into Connexa, diluting the Connexa holding of Spark but also modestly increasing the value of that stake: Total $168m. (AR2023 p103).

Total FY2023 Profit Adjustment = (-$583m+$54m-$5m+$30m) -$168m = -$672m
Total Normalised FY2023 Profit = $1,135m - $672m = $463m





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Now, how does that $646.6m imputation credit total paid out line up with the amount of tax paid up by the company over the SOFY2021 to EOHY2024 reference period? From the respective cashflow statements:

Income Tax paid over FY2021	$188m
Income Tax paid over FY2022	$160m
Income Tax paid over FY2023	$190m
Income Tax paid over HY2024	$101m
Imputation Credit Balance Owing EOHY2024	$?m	(Balance owing was 'nil' at 31/03/2024, but not declared at 31/12/2023)
Confirmed Total	$639m

At this point I should record that 'cash payments' of tax in any particular year can include wash up payments for a previous year and forecast provisional payments for an ensuing year. So if you compare the tax payments from the cashflow statement for any particular year, and try to compare that to the NPBT for the year multiplied by 28% (the company tax rate), then those two numbers may not be equal, But if you do a sum comparison over many years those single year tax differences will tend to average out.

This means almost enough tax has been paid to cover those fully imputed dividends to EOHY2024. The figures imply that at EOHY2024, there was a negative imputation credit balance (tax debt owing) on the books of: $646.6m-$639m=$7.6m to 'close the gap'. Spark are only legally required to 'close that gap' (not have a negative imputation credit balance) for 'tax not paid' by 31st March of the following calendar year (31-01-2024). That explains why they haven't done it - a prudent conservation of cash measure no doubt - at the HY2024 reporting date (31-12-2023).

The problem that remains is that when we add up operational earnings, in this case for a 3.5 year period, the sum total is significantly less than the net dividends paid out over that same period. Sure if you add back the one off profit from the Connexa sale, then the dividends paid since our reference date are perfectly affordable. But pumping up dividends (and the supporting tax payments to IRD to allow full dividend imputation?) from either borrowings or the proceeds from asset sales, did not seem sustainable to me a year ago. And it still doesn't now.

SNOOPY

[Snoopy]

The problem that remains is that when we add up operational earnings, in this case for a 3.5 year period, the sum total is significantly less than the net dividends paid out over that same period. Sure if you add back the one off profit from the Connexa sale, then the dividends paid since our reference date are perfectly affordable. But pumping up dividends (and the supporting tax payments to IRD to allow full dividend imputation?) from either borrowings or the proceeds from asset sales, did not seem sustainable to me a year ago. And it still doesn't now.

Declared Earnings verses Dividends Paid FY2021 & FY2022 & FY2023	Gross Dividend	Net Dividend	Imputation Credits	Declared HY Net Earnings
Second HY dividend period FY2020 (12.5cps)	$319.4m	$230m	$89.4m	$147m
First HY dividend period FY2021 (12.5cps)	$320.8m	$231m	$89.8m	$234m
Second HY dividend period FY2021 (12.5cps)	$323.6m	$233m	$90.6m	$179m
First HY dividend period FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$231m
Second HY dividend period FY2022 (12.5cps)	$325.0m	$234m	$91.0m	$165m
Sub Total		$1,162m	$451.8m	$956m
First HY dividend period FY2023 (13.5cps)	$350.0m	$252m	$98.0m	$298m
Sub Total (FY2023 balance date)		$1,414m	$549.8m	$1,254m
Second HY dividend period FY2023 (13.5cps)	$345.8m	$249m	$96.8m	$157m
Sub Total		$1,663m	$646.6m	$1,411m
First HY dividend period FY2024 (13.5cps)	$340.3m	$245m	$95.3m	$?m
Total		$1,908m	$741.9m	$?m

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A few more reflections on the above table, which, given I have been tweaking it for the last couple of days, may look a little different now to those who saw it in its original form.

What is very apparent now is the 'seasonality between halves' in the earnings results. Being a utility company I had assumed that profits would have been more or less equally distributed throughout the year. How wrong I was to have assumed that! Those numbers are nevertheless consistent with the recent half year conference call response on how the business operates.

2/ Cashflow was down on the pcp, due to the larger share of the investment capital program, including investments in CRP (the 'cost reducing program'?), going through in the first half year. $286m of this years capital investment from a $510-$530m capital investment .program was spent, including the Takanini data centre expansion, completed in the first half of the financial year. The key driver of cashflow going forwards will be the improvement in EBITDA. Marketing and acquisition costs are incurred 'up front', before the customers 'come on board' in the second half year. Mobile price increases, larger Data Centre scale, and IT product growth (following on from a pcp decline), should improve the top line in 2HY2024.

Having said that, the way Spark claim they operate looks a bit iffy under more scrutiny. Why do they spend big from July to December to reap the rewards in January to June? Wouldn't it be equally valid to spend in January to June to reap the rewards in the following July to December?

This seasonal earnings phenomenon affects the 'imputation credit hunt' in a noticeable way. The cumulative difference between income tax paid on earnings and imputation credits paid out over the same period is much less marked:
i/ at the full year balance date (for FY2023: $1,414m-$1,254m=$160m)
ii/ compared to the ensuing half year balance date (HY2014: $1,663m - $1,441m = $222m), or
iii/ compared to the preceding half year balance date (HY2013: $1,162m-$956m = $206m).

There is less detail presented in the unaudited half year reports. That makes chasing up what has been happening to those tax payments more difficult. But I did find this in HYR2023 on page 10, referring to the sale of cell towers to Connexa.

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Deferred tax assets and income tax credit

Due to the difference between the right-of-use assets and lease liabilities recognised at the date of the transaction, a non-cash deferred tax asset of $126 million was recognised, with a corresponding adjustment to tax income. As noted in the statement of cash flows on page 6, payments for income tax in H1 FY23 were $120 million (H1 FY22: $93 million).

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At EOFY2022 the total Deferred Tax Asset and Liability number was a deficit: ($108m) (see AR2022, Financial note 6.1, p120)
At EOFY2023 the total Deferred Tax Asset and Liability number was a positive: $55m (see AR2023, Financial note 6.1, p121)

That is a turnaround of $55m--$108m=$163m. That is very close to my calculated cumulative full year tax deficit for FY2023 above, of $160m.

So what do you think fellow sharetraders? Have I solved the missing tax payment mystery? Can what I had thought of as a paper 'accounting adjustment on a leaseback deal' really reduce income tax payment requirements due in real time by counting as 'income tax paid'? Or is all of this an irrelevant co-incidence?

SNOOPY

[Snoopy]

My sniffer ran into a blind alley last year, as the hunt for the source of those 'bonus' imputation credits went unsolved. But I am back on the trail again sniffing around the Spark accounts to try and figure out where those extra imputation credits, over and above normalized profits, came from. At this point most dogs would be happy with a good pat, a few dog biscuits and a bit of time in a warm corner of the house to have a sleep in the dog basket. So why am I still sniffing around out here?

In a word 'yield'. If I invest in a company for its yield, then I have to figure out if that yield is genuinely sustainable. The management remark that we just keep driving the EBITDA up 'year on year' and the increasing yield simply falls off that, doesn't cut it with me. Sure I would like it to be true. But I like to invest on proven results. And if the real results can be shown to be better than what has been achieved in the recent (five year time-frame) past, then I will take that as a bonus. But I will not project ever increasing earnings as the basis for my investment case in a utility, even a well run one, like Spark.

The board and senior management have so far kept out of the criminal courts. So I have to assume what they are doing is legitimate, even if I don't follow all the fine detail. But at the back of my mind I still can't shake the belief that it is the 'operational net profit after tax', which is what will drive sustainable dividend income at Spark, and the extra dividends we shareholders are getting over and above 'normalised operational profits' are ephemeral.

In summary, I don't want to base my investment case on getting a perpetual 6.5% gross yield, for Spark to suddenly reveal, a couple of years down the track that 20% of the profit declared since EOFY2020 are 'gerrymandered accounting constructs' and the real underlying yield is only 5.5%. Ever since the Chorus split days, Spark has been shedding assets (think yellow pages and the cellphone towers). I have to think we are nearing or at the end of these 'one off profit boosts'. So the ability to massage the accounts through one offs must have dried up.

I don't want to open the 202x Annual Report, and find the Chairman of the Board's introduction to read
"Ha ha ha, we fooled you shareholders good and proper didn't we!"

So this is why the sniffing must go on. I have to find out for sure if that 'dividend yield' really is real.

SNOOPY

[Snoopy]

'Deferred tax assets and/or liabilities' are always presented as a cumulative total on the balance sheet. I need to present the earnings history in a comparative cumulative format. The table below is the same data presented in post 2122, but in that different (cumulative) format. I use the EOFY2020 as a start point, because we know the imputation credit balance was nil on that date.

Another point to bear in mind is that the imputation credits paid out only need to match or be less than the imputation credits created on 31st March each year. And because the half year ends in December and the full year in June, a 31st March date does not correspond to any of the reference dates in the table below.

Declared Earnings verses Dividends Paid FY2021 & FY2022 & FY2023	Cumulative Net Dividend {A}	Cumulative Imputation Credits	Cumulative Declared HY Net Earnings {B}	Cumulative Net Earnings Shortfall {A}-{B}	Cumulative Imputation Credit Shortfall (1)	Deferred Tax Assets (Liabilities)	Cumulative Deferred Tax Assets (Liabilities) from base
Start Point: End of FY2020	$0m	$0m	$0m	$0m	$0m	($61m)
Sub Total (HY2021 balance date)	$230m	$89.4m	$147m	$83m	$32m	($54m)	$7m
Sub Total (FY2021 balance date)	$461m	$179.2m	$381m	$80m	$31m	($82m)	($21m)
Sub Total (HY2022 balance date)	$694m	$269.8m	$560m	$134m	$52m	($81m)	($20m)
Sub Total (FY2022 balance date)	$928m	$360.8m	$791m	$137m	$53m	($108m)	($47m)
Sub Total (HY2023 balance date)	$1,162m	$451.8m	$956m	$206m	$80m	$44m	$103m
Sub Total (FY2023 balance date)	$1,414m	$549.8m	$1,254m	$160m	$62m	$55m	$116m
Sub Total (HY2024 balance date)	$1,663m	$646.6m	$1,411m	$252m	$98m	$58m	$119m

Notes

1/ Calculating associated imputation credit 'I' from NPAT: I/(I+NPAT) = 0.28 => 0.28NPAT + 0.28I = I => I = (0.28/0.72)NPAT

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Lots of numbers here. The important information to focus on are the two columns in bold.

The first column in bold is the 'imputation credit shortfall'. This is the quantum of imputation credits that have actually been paid out, but which are attached to 'earnings in excess of normalised income'. How is this possible? It is possible if a company already has a store of imputation credits 'in the IRD bank' (so to speak) that are available to 'top up' the imputation credits paid out in relation to normalised operational earnings.

Does Spark have such a top up source available? This is where 'bold column 2' comes in. If the cumulative imputation credits in this second column exceed the corresponding cumulative number in the first column, then there is nothing to stop Spark using those 'imputation credits in the IRD bank' to pay out that imputation credit shortfall. Looking at the table, we can see that this was indeed possible based on the 'column 2 bold balances' exceeding the 'shortfall imputation credits' over the HY2023, FY2023 and HY2024 periods.

Yet as an astute observer, you might say.
"Just a moment Snoopy. If the tale you are telling us is true, that does not explain the earlier dividend periods of HY2021, FY2021, HY2022 and FY2022. In those periods your table clearly shows that the 'imputation credit balance at the IRD' was not sufficient to top up the imputation credit shortfall. In fact in most of those periods the 'IRD bank' imputation credit balance was actually negative. Yet in all of those periods fully imputed dividends still were still paid out in excess of operational earnings. So your theory is a load of codswallop. It doesn't stack up!"

That criticism seems soundly made. But it misses a key point. The available imputation top up only has to balance the imputation credits paid out on 31st March each year. It is quite possible for Spark to top up the imputation credit balance on that date, whereupon once the ensuing dividend is paid, the 'IRD imputation credit account' crashes into the negative again. The point is the critical date for this top up system to work is the 'IRD imputation credit account' balance on 31st March. The 'IRD imputation credit account' balance on 31st March is not declared to shareholders. But we can infer it must have been topped up on that date. Because that is the only way those dividends paid during those HY2021, FY2021, HY2022 and FY2022 periods could have been paid fully imputed.

Some here may be shocked to learn that I am accusing Spark of 'borrowing to pay the dividend' over those four periods. But in these matters Spark has 'got form'. From a post I made in April 2023:

Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings. The last dividend paid during FY2020 was the interim dividend for FY2020. That dividend was only 75% imputed. Looking back further, the previous four semi-annual dividends were likewise only 75% imputed.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy.

So there is my explanation of what has been happening with the Spark dividend. My post 2122 was kind of along similar lines. But I mixed up the comparative units that I was meant to be lining up against each other. So I now think my explanation outlined in post 2122 is wrong. I am much happier with the alternative explanation outlined in this post. But please feel free to criticise this explanation, if you think I have screwed up again! In anticipation of this not happening, I think I will sleep well in the dog basket tonight, in the belief that I have finally got to the bottom of this 'phantom imputation credit' problem.

SNOOPY

[Snoopy]

Sometimes tax credits can materialise out of thin air, as a result of selling assets to a new entity in which you become a shareholder. Of course I am describing the Connexa transaction. I have used this 'fact' to explain where a lot of imputation credits paid out over and above what might be expected from 'normalised' income came from. But this doesn't explain where the money for extra imputation credits came from, before the Connexa separation agreement. It is worth keeping tabs on these alternative cash sources, which is the point of this post.

Two sources worth looking at are:
i/ Existing shareholder equity AND
ii/ Net cash gains from derivative transactions.

So what were the changes in shareholder funds on the balance sheet of Spark at EOFY2021, EOFY2022, EOFY2023 and EOHY2024?

Available Drawdown Capital	FY2020	FY2021	FY2022	Summed Incremental Change to EOFY2022	FY2023	HY2024	Summed Incremental Change to EOHY2024
Shareholder Funds	$1,474m	$1,503m	$1,475m	$1m	$1,357m (1)	$1,085m (1)	($389m)
Short Term Derivative Assets	$1m	$12m	$5m	$4m	$1m	$0m	($1m)
Long Term Derivative Assets	$60m	$24m	$13m	($47m)	$27m	$12m	($48m)
Short Term Derivative Liabilities	($5m)	($4m)	($1m)	$4m	($4m)	($4m)	$1m
Long Term Derivative Liabilities	($156m)	($91m)	($77m)	$79m	($94m)	($75m)	$81m
Total Derivative Assets Only				$40m			$33m
Overall Total				$41m			($356m)

Notes

1/ Net earnings for FY2023 are quoted as $1,135m. This the figure that flows through to the increase in shareholder equity. But that figure
includes a $583m contribution from the Connexa transaction. The object of this exercise is to follow the change in equity excluding that transaction. This will allow us to determine the equity flow in the underlying business, assuming that transaction did not take place. Thus we are removing any effect of the Connexa transaction 'papering over' any leakage of shareholder capital were it not for this one off event.

The adjusted shareholder equity for FY2023 and HY2024 is therefore recorded as follows:
FY2023: $1,940m - $583m = $1,357m
HY2014: $1,668m - $583m = $1,085m

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SNOOPY

[Snoopy]

This is the discussion post for the numbers I have calculated and put down in the table in post 4a above.

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We are discussing two particular points of time, and how Spark managed to pay for their 'fully imputed dividends' at each of those points of time:
a/ The EOFY2022 before the Connexa transaction.
b/ The EOHY2024 after the Connexa transaction.

EOFY2022

Post 2124 shows an underlying $53m shortfall in the tax payments required to maintain the dividends as fully imputed up to this date. But post 2125 shows a positive summed incremental shareholder equity change of $41m at this time point. Strictly, that means there is still an $8m shortfall of cash to fund those fully imputed dividends. But as far as the tax department is concerned, Spark would have until 31st March the following year to make up this difference. Also remember we are talking about Spark here. By the time CEO Jolie Hodson has finished her morning latte on a Monday, that $8m would've already flowed into Spark's bank account in the allotted fifteen minute coffee break. $8m is not big money in Spark corporate terms.

I therefore conclude that Spark would have no problem pumping up their imputation credit account with the IRD by $53m, to allow those dividends paid up from EOFY2020 to EOFY2022 to be fully imputed. I remain conscious that it is just one way of looking at this is to say that most of the extra capital needed to do the 'dividend prop up' has come from revaluations in derivatives at the EOFY2022 time point. And Spark is not a 'derivative trader'. So Spark would have taken out those derivative positions to hedge against known future payments, such as the $500m in foreign domiciled medium term notes that form part of Spark's debt funding package. In my judgement, it would be highly irregular to use these transient changes in the supporting underlying derivative values to fund operational activities. Of course, no doubt Spark would disagree with by interpretation of where this extra capital to fund dividend payments came from. Spark would just say that it was instead funded through pre-approved increases in operational borrowings. This is what happens when you have a 'big balance sheet'. It almost becomes a matter of opinion as to where a particular rise in capital available for deployment comes from. But given any derivative value volatility would be expected to 'net out to zero' by eventual payback time, I am sticking to my view.


EOHY2024

We now move on to the most current declared balance sheet position. This is showing a massive drawdown in shareholder capital of $356m, just to maintain the rate of fully imputed dividends above underlying earnings levels. Of course the real position is not as dire as this, because I have removed the $583m gain booked from the Connexa transaction from the table. So the actual capital position of Spark is entirely healthy. But the Connexa transaction was a one off. The point of my table is that it shows that operationally, in my view, Spark are unable to sustain the fully imputed level of dividend payment that we see today.

Of particular note at the EOHY2024 balance date, is the snapshot valuation of the derivatives at $33m. It is still positive, and some might say on track to zero as we might eventually expect. But it is now very much 'out of the money' in being able to cover the accumulated imputation credit shortfall of $98m (see post 2124) on that date. This means that the increasing imputed dividend is not being covered by an operational increase in EBITDA as management have alluded to (post 2118, bullet point 2), but has instead been funded by the one off Connexa sale. Once again no doubt management would disagree with my interpretation of events. They would point to the big CAPEX spend in data centres, with the future associated contractual demand, and the big spend on 5G to enable future as yet unimagined sources of cashflow for the future supporting the ever increasing EBITDA comment. IOW they are looking through today's operating earnings, using the time the Connexa sale has given them for improving underlying operating earnings and they are seeing only the blue skies ahead. I am actually very respectful of current management, and I believe they have a very good chance of delivering on their dreams. BUT predictions can be notoriously uncertain - especially about the future.

To me what is happening is akin to a New Zealand Cricket test match, where Kane Williamson is due to take up his position at the crease for NZ, when he drops the comment:
"Actually I am New Zealand's greatest ever batsman. My record stands for itself. So actually I do not need to go out and bat, because statistically we know what the result will be."

To which I would say, "Actually Kane you do need to bat. You can't just rely on yesterday's projections to accumulate your score in present day time." Likewise Spark has to get their own 'runs on the board' to make their earnings projections come true. And Microsoft and AWS in datacentres, and OneNZ and 2degrees in mobile, are there to make getting those incremental 'runs on the board' as awkward as possible.



Summary Position

I believe that since 2020, Spark have been massaging their cashflows in a way that creates the impression of gently increasing fully imputed dividends. There have been some deft moves with capital, and a well thought one off transaction that have allowed Spark to present this very favourable dividend picture to shareholders. But current operational earnings do not support this dividend flow picture. Capex initiatives have put Spark in a position where this favourable dividend position could realistically become reality. But hope, in itself, is not a successful sharemarket strategy, without the execution to 'back it up'. And execution has to be earned, not assumed. A fully imputed dividend at today's levels should not be taken as a given going forwards. Any investor chasing yield, should allow a suitable discount factor on their share price purchase to reflect the reality of future dividend uncertainty.

SNOOPY

discl: hold SPK

[Snoopy]

Buy on the dips and hang in there for the dividends. That is basically what I have done. The liquidity gives you a ready exit should you require it. Personally I have never sold any SPK, even at what I feel might be cyclical highs. Because I am having trouble finding alternative investments that I understand that are selling at a discount to fair value.

As for 'never really going to be a money maker', well that depends on your time-frame and outlook. If I can round up a few Spark shares and get a 6.5% (or a bit better) gross yield, then I am very happy with that. I can't see any real evidence that Spark will give you an 'investment home run' in the foreseeable future. But 'stealing a base' here and there for a more modest (and less liable to be struck out) return I can cope with, and appreciate. For me an investment in Spark is almost a bond proxy. I haven't invested in bonds for quite a few years now as I prefer investments like this to be part of my 'insurance policy' against portfolio volatility. A return that gives a good premium to bank interest rates without too much risk.

I was trawling through some old posts today. When I got to the one above I thought "That guy sounds really sensible." Then I looked at the poster name and found out "That guy" was me! LOL!

I really wanted to buy some more PGW shares today. But because of my self imposed investment rules, I was not allowed to, until I had bought something else first. And that has lead me here!

From an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's slightly less high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

175.35 / 5 = 35.07c

The capitalised dividend value of Spark (fair value) is therefore: 35.07c/0.065 = $5.40

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.40 x 0.9 = $4.86. With the share closing at $4.76 on Friday, 'Ring ring'?

At under $4.70. I was happy to 'answer the call' and pick up a few more Spark shares today. I cautioned investors about paying too much for Spark shares in my post 2126, with the future yield uncertain. But $4.70 represents a 13% discount to the capitalised dividend fair value target price of $5.40, that would have lock in that 6.5% gross yield I was after. Or put another way, my modelling suggests a gross yield of 7.5% at $4.70. That has to be value, and a sufficient discount to mitigate my income uncertainty risk. Especially when the latest Spark SPF600 5.45% bonds are currently trading at around 5.4% on the secondary market. Why would you want to own Spark bonds when the yield offered by the Spark shares is a full two percentage points higher? To me that just seems unfathomable! But I suppose that is why I am a 'share guy' and not a 'bond guy'.

SNOOPY

[Mrbuyit]

Hi Snoopy,

Can one assume that you are reasonably sure that SPK are not burning the furniture?

It kind of sounded like your were suggesting this in one of your earlier posts, but maybe I got that wrong..

[Snoopy]

Hi Snoopy,

Can one assume that you are reasonably sure that SPK are not burning the furniture?

Nope. My investigations would suggest that Spark have done exactly that. But fortunately the Connexa fire truck arrived, and the blazes were smothered. The company even got a bonus from the Connexa Fire truck people for being so 'positive' about their greedy consumption that lead to the blaze in the first place. How good was that?

It kind of sounded like your were suggesting this in one of your earlier posts, but maybe I got that wrong..

It sounds like you got my message loud and clear. But like many things in business, this is not totally a black and white issue.

a/ IF Spark are paying out more than they earn from underlying normalised operations, BUT
b/ There is a good chance that capital investments made during this period will allow Spark to earn more than they have earned in the past, which will support the future dividend at current levels
c/ THEN that is good news for shareholders.

But like all forecasts of the future, there is execution risk. Personally I believe Spark show a good chance of 'pulling it off'. But to account for the execution risk, I believe that as an investor, you should choose a discount on the price you are willing to pay for Spark shares that are promising to generate that 'forecast future income'.

In my judgement, a 6.5% gross dividend return is a reasonable enduring expectation from an established utility market player like Spark. While the SPK share remains below $4.70 you are actually buying more than a 7.5% gross return on your Spark shares. I judge that to be a sufficient discount to allow for the execution risk of Spark's business plans going forwards. But I don't want to force my expectations of a reasonable return, nor how much they should discount any purchase plan, on other investors. Everyone here has to make their own decisions on where they lie on this risk/return spectrum. And that will determine the price another investor will be prepared to pay for Spark shares, which may be more or less than my SPK share price value choice.

SNOOPY