SPK- Spark NZ (TELCO)

[SailorRob]

Not true. Spark has not underperformed cash over 31 years




I think you are starting to get where the real measuring stick for Spark shares should be set.



The share price has been up and down but there has been no massive permanent decline as you suggest. Unless you deliberately pick a peak and a trough to make your (false) point.



Not every investor wants all of their portfolio 'operating to the max' to get outstanding growth. Sometimes having part of your portfolio that produces a steady income return is more the ticket. I guess 'corporate bonds' could provide such a solution. But not being a bond investor myself, I think of my Spark shares as a kind of defacto bond.

Of course, Spark have their own bonds. The SPF570 bond last traded on the market at 5.17%.

OTOH the 'Spark shares bond' last traded on an historical gross dividend yield of (27/0.72) / 423 = 8.87%

So SPF570 at 5.17% or SPK at 8.87%? Hmmm, I seem to be having some difficulty in making up my mind here. Which 'bond' should I choose SailorRob?

SNOOPY

What's the duration of the bond?

For me I wouldn't touch Spark equity no matter the yield, so I'd pick the bond every time and over 15 years I would not be comfortable holding the bonds either, I'd take big Grants 10 year over spark, no brainier.

[ValueNZ]

=
So SPF570 at 5.17% or SPK at 8.87%? Hmmm, I seem to be having some difficulty in making up my mind here.

That's a false dichotomy. Your options to allocate capital extend far beyond Spark lol.

[Snoopy]

What's the duration of the bond?

spf570 has 2.5 years until maturity. Trading at 5.1% today

For me I wouldn't touch Spark equity no matter the yield, so I'd pick the bond every time and over 15 years I would not be comfortable holding the bonds either, I'd take big Grants 10 year over spark, no brainier.

NZ ten year government bonds are trading at 4.6% today. As an investment prospect, that is too low for me. Although I do admit to having term deposits with capital 'waiting to be deployed' at interest rates lower than that.

Spark shares are trading on an historic gross yield of 8.9%, based on historical annual dividend payments of 27cps, or a gross figure of 27cps/0.72 = 37.5cps. I don't use that figure myself when evaluating income investments. I am much more interested in the five year gross historical average which comes out at 35.07cps
https://www.sharetrader.co.nz/showth...=1#post1047369

With a share price of $4.23, that gives me a five year average gross yield of 35.07c/$4.23= 8.3%

What ever way you look at it, I am getting a a near 4 percentage point gain in cashflow (something like 80%) over opting to give my money to big Grant. I am happy to exchange a little Spark share price volatility for that. As far as I am concerned 'Big Grant' can take a jump with his miserly offer (which of course he did, all the way down to Otago University).

SNOOPY

[Snoopy]

That's a false dichotomy. Your options to allocate capital extend far beyond Spark.

Of course. I am not suggesting people throw all their money into Spark shares or anything like that. All shares have risks and I have previously outlined in this thread what I think they are for Spark going forwards. I am hoping things don't go wrong. But I try to pick my shares so that if things do go wrong, all of my shares will not be equally affected at the same time. IOW the portfolio has some built in robustness to the unexpected. Just before my latest share purchase, Spark shares made up a fraction over 10% of my NZX portfolio, which is made up of twelve different shares. Ideally my target is to have SPK weighted a couple of percentage points more than that, because the portfolio weighting of my two other 'bond' utility type shares, CEN and MCY, are higher than that 10% figure. I judge myself underweight in Spark, so I am adding a few. That is all that is happening here, from my perspective.

SNOOPY

[SailorRob]

spf570 has 2.5 years until maturity. Trading at 5.1% today



NZ ten year government bonds are trading at 4.6% today. As an investment prospect, that is too low for me. Although I do admit to having term deposits with capital 'waiting to be deployed' at interest rates lower than that.

Spark shares are trading on an historic gross yield of 8.9%, based on historical annual dividend payments of 27cps, or a gross figure of 27cps/0.72 = 37.5cps. I don't use that figure myself when evaluating income investments. I am much more interested in the five year gross historical average which comes out at 35.07cps
https://www.sharetrader.co.nz/showth...=1#post1047369

With a share price of $4.23, that gives me a five year average gross yield of 35.07c/$4.23= 8.3%

What ever way you look at it, I am getting a a near 4 percentage point gain in cashflow (something like 80%) over opting to give my money to big Grant. I am happy to exchange a little Spark share price volatility for that. As far as I am concerned 'Big Grant' can take a jump with his miserly offer (which of course he did, all the way down to Otago University).

SNOOPY

Yes but as you know it's not the historical dividend that matters.

This company has had a real decline in revenues of 23% in 10 years and that is with an exploding population.

It had made up for that with expanding margins, you are well aware that margins cannot expand forever and particularly not in this hyper competitive industry, much more likely to see margin compression.

Given that all earnings have been paid out, the near 50% increase in assets at work has been paid for with a large increase in debt. This will be pressing on margins as well in the normal interest rate world.

So given you focus so much on the past, how in the hell are they going to start growing revenue in real terms now?

If they can't grow revenue in real terms, and as we have discussed they cant keep expanding margins, cant keep loading up on debt... How the hell is your dividend going to increase or even be maintained?

So with a declining dividend (particularly in real terms) your capital value will also decline far more rapidly and you will be in a situation where you never get your money back now matter how long you wait.

This is why you pick the bonds as you have a good chance of getting that return, or if you dont, you'll own the equity (if there is any left).

Now we haven't even touched on CAPITAL requirements yet... I see they are spending way more than depreciation... How are you sure you're getting a return on that investment and what will it be?

[Snoopy]

Yes but as you know it's not the historical dividend that matters.

You are right, future dividends are what matters. But I still find the recent past is the best predictor of the near future. And the one thing you know about historical figures is that the organisation structure does have the capability to achieve them, because they have done so before....

This company has had a real decline in revenues of 23% in 10 years and that is with an exploding population.

I presume when you are talking about a 'real decline' you are bringing inflation into the equation? I don't buy that argument with tech companies. Tech always gets better and cheaper to do the same stuff. So the driver of revenue must be in the form of 'new applications'. Even using the term 'revenue' is a misnomer, because, as you saw in post 2171, 'revenue' in 2013 does not have the same meaning as 'revenue' in 2023.
https://www.sharetrader.co.nz/showth...=1#post1052189

If you take out the revenue from the Australian operation from FY2013 that was sold off, 'revenue' did actually grow over the ten years. The other thing that has cramped 'revenue' is the constant and unrelenting decline of the old PSTN copper landline technology. The decline in that has been masking the growth in revenue in other areas. The point must come, sooner rather than later I feel, that this decline in the legacy network slows and what remains is the residual: possibly the rural copper network where it is uneconomic to roll out fibre. At that point the real growth in new areas will show through as positive growth in its own right, not new technology just netting off against the decline of the old.

It had made up for that with expanding margins, you are well aware that margins cannot expand forever and particularly not in this hyper competitive industry, much more likely to see margin compression.

Not sure where you get this 'expanding margins' thing from. I am not seeing it. I am certainly not predicating any future dividend growth on 'expanding margins'.
https://www.sharetrader.co.nz/showth...=1#post1022605

Given that all earnings have been paid out, the near 50% increase in assets at work has been paid for with a large increase in debt. This will be pressing on margins as well in the normal interest rate world.

MDRT stood at 1.72 years immediately after the cell phone tower transaction was concluded.
https://www.sharetrader.co.nz/showth...=1#post1048917

Since then it has blown out again, both from network investment, data centre investment and those share buybacks. But those share buybacks in particular are a capital optimisation tool. If Spark did not have 'excess capital' they would not have done them. So I don't think you can say current debt levels are an issue when Spark voluntarily put themselves in the balance sheet position they are in.

So given you focus so much on the past, how in the hell are they going to start growing revenue in real terms now?

5G mobile will open up new applications, as will the drive into more data centres. That's the plan anyway.

If they can't grow revenue in real terms, and as we have discussed they cant keep expanding margins, cant keep loading up on debt... How the hell is your dividend going to increase or even be maintained?

I don't accept the 'perpetual declining revenue' argument you are putting forward for reasons previously explained. Also, part of the way profit can expand unrelated to revenue is a continued laser focus on costs. As older network technology is retired, that will reduce costs. More AI on the help desk might be another example.

So with a declining dividend (particularly in real terms) your capital value will also decline far more rapidly and you will be in a situation where you never get your money back now matter how long you wait.

But the dividend is not declining is it? Quite the reverse, it has been raised this year - albeit very modestly. And this is the reason I use 'actual historical dividends' from the last five years to make my investment case. It means that if dividends did fall back towards those paid in earlier years, my investment case would still stack up. I am not relying on 'bullish forecasts from management' to cement my investment case.

This is why you pick the bonds as you have a good chance of getting that return, or if you don't, you'll own the equity (if there is any left).

I know this is the theory. But in practice can you name one company where shareholders have lost, but the bondholders come out scott free? Also being an equity holder gives me more access to 'upside risk' than being a bond holder.

Now we haven't even touched on CAPITAL requirements yet... I see they are spending way more than depreciation... How are you sure you're getting a return on that investment and what will it be?

The capital spent on 5G and data-centres is up front and has mostly happened. The main return from that spend has yet to come through.

SNOOPY

[SailorRob]

You are right, future dividends are what matters. But I still find the recent past is the best predictor of the near future. And the one thing you know about historical figures is that the organisation structure does have the capability to achieve them, because they have done so before...

Yes much the way I look at things as well, I like how you normalise things over a period of years - very important.


I presume when you are talking about a 'real decline' you are bringing inflation into the equation? I don't buy that argument with tech companies. Tech always gets better and cheaper to do the same stuff. So the driver of revenue must be in the form of 'new applications'. Even using the term 'revenue' is a misnomer, because, as you saw in post 2171, 'revenue' in 2013 does not have the same meaning as 'revenue' in 2023.
https://www.sharetrader.co.nz/showth...=1#post1052189

If you take out the revenue from the Australian operation from FY2013 that was sold off, 'revenue' did actually grow over the ten years. The other thing that has cramped 'revenue' is the constant and unrelenting decline of the old PSTN copper landline technology. The decline in that has been masking the growth in revenue in other areas. The point must come, sooner rather than later I feel, that this decline in the legacy network slows and what remains is the residual: possibly the rural copper network where it is uneconomic to roll out fibre. At that point the real growth in new areas will show through as positive growth in its own right, not new technology just netting off against the decline of the old.


Yes correct about inflation, agreed with tech getting better and cheaper but revenue must be maintained in the face of this. Good points you raise that you as a local know and I as a tourist don't and a lesson that you need nuance if casually glancing at revenue numbers over a decade. I had assumed that margins must have expanded as you had said that the business had improved a lot when I raised flat revenues, now I understand what you mean.



Not sure where you get this 'expanding margins' thing from. I am not seeing it. I am certainly not predicating any future dividend growth on 'expanding margins'.
https://www.sharetrader.co.nz/showth...=1#post1022605


MDRT stood at 1.72 years immediately after the cell phone tower transaction was concluded.
https://www.sharetrader.co.nz/showth...=1#post1048917

Since then it has blown out again, both from network investment, data centre investment and those share buybacks. But those share buybacks in particular are a capital optimisation tool. If Spark did not have 'excess capital' they would not have done them. So I don't think you can say current debt levels are an issue when Spark voluntarily put themselves in the balance sheet position they are in.

Many companies have voluntarily put themselves in balance sheet positions that have become major issues. Wasn't so much that I think they are an issue, just an observation.


5G mobile will open up new applications, as will the drive into more data centres. That's the plan anyway.

Yes, will need to see what the returns are on all that CAPEX.


I don't accept the 'perpetual declining revenue' argument you are putting forward for reasons previously explained. Also, part of the way profit can expand unrelated to revenue is a continued laser focus on costs. As older network technology is retired, that will reduce costs. More AI on the help desk might be another example.

Yes you explained the revenue argument well. But if profit can expand unrelated to revenue - in other words expanding margins, but all the competitors have the same technology so usually the AI on the Helpdesk type advancement all goes to the customer and doesn't tend to stick with higher margins for the company.



But the dividend is not declining is it? Quite the reverse, it has been raised this year - albeit very modestly. And this is the reason I use 'actual historical dividends' from the last five years to make my investment case. It means that if dividends did fall back towards those paid in earlier years, my investment case would still stack up. I am not relying on 'bullish forecasts from management' to cement my investment case.

No it's not, perhaps you could argue in real terms that it is, but my comment related to the possibility of the future with the assumptions I had made with revenue, rapid technology change, CAPEX and debt.


I know this is the theory. But in practice can you name one company where shareholders have lost, but the bondholders come out scott free? Also being an equity holder gives me more access to 'upside risk' than being a bond holder.

Scott free, no I can't name one, there would be plenty that the senior bond holders were eventually made whole but I get the point.


The capital spent on 5G and data-centres is up front and has mostly happened. The main return from that spend has yet to come through.

Yes and then it's the next round of CAPEX after that for the new generation tech, god only knows what the world in this respect will look like in 10 years. The OPEX of the data centres must be significant.

SNOOPY

Great response Snoopy, good points all taken on board.

Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.

You have done your work and know your $hit however. At a certain price I could be interested.

Wrightsons seems far more compelling an opportunity at present, what do you think of the two compared side by side right now?

[DarkHorse]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH

[Snoopy]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH

This is getting a bit old now but.......

https://www.sharetrader.co.nz/showth...l=1#post909170

I have to say I do not favour government regulated utilities, and in particular Chorus where Spark has vowed to undermine the Chorus broadband base by promoting 'wireless broadband'. I also do not like the debt position at Chorus. I have never bought any Chorus. But I do own a small holding courtesy of the Telecom split. I should really tidy that holding up. But I am keeping it for now, just for the insight it can give me as a 'customer supplier' to my preferred telecommunications hold, - that being Spark.

SNOOPY

[mshierlaw]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH

I used to be a solid believer in dividend yields as a secure means of generating income. The last few years have shown numerous dividend traps generated in this market. I think bond proxy is now a thing of the past. Buyer beware