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Utility shares have many features that fixed income investors seek; we look at the MRP returns ahead of the Meridian float

Utility shares have many features that fixed income investors seek; we look at the MRP returns ahead of the Meridian float

With the launch of the new Meridian share offer, it is timely to review how the Mighty River Power investors have fared on their investment.

The partial selldown by the Government of MRP was floated on May 16, 2013 with 113,000 investors buying 675 million shares of the 1.4 billion issued by the company. The Government holds the majority.

Those investors paid $2.50 per share.

The company has announced a 7.2c/share fully imputed dividend payable on September 30, 2013.

Many investors would have taken a position on the basis that the company is a traditional utility and as such, investments in these types of companies are dividend focused, and dividend yields are usually very reliable and and have many of the features of fixed income securities.

Such investors typically hold these positions over the long term, and the price of the underlying share reflects the yield more closely than most other classes of equities.

Fully imputed dividends add to the attractiveness.

Assuming you bought 10,000 shares, your investment on May 16 was $25,000.

Your imputed dividend will be received on September 30, giving a tax paid annualised yield for the period of 7.3%.

Assuming your alternative investment was a bank term deposit, and you switched from a rolling one year commitment with interest paid annually, you would have only earned 2.9% tax paid on the TD. A term PIE would have added a small premium.

    MRP share Bank TD
May 16, 2013 Investment, 10,000 @ $2.50 each $25,000 $25,000
Sept 30, 2013 Fully 7.2c imputed dividend (@ 28%) $     720  
  Interest @ 4.25% pa (RaboDirect at May 16)   $     399
  Marginal tax payable (@ 33% *) $       36 $     132
  Tax paid return $     684 $     267
137 days Annualised % tax-paid return 7.28% 2.85%

* In this review, we are assuming tax for someone on the highest rate. Fully imputed dividends have tax paid up to 28% by the company. Investors are responsible for paying the balance up to their own tax rate.

Part of the good return is because of the compressed holding time - 137 days for a half-year dividend received. On a full six-month basis, it should be sustainable at 5.47% pa tax paid.

Returns like this are much better than available in the term deposit sector. But you need to get comfortable with a variable share price - it should matter less if you are a long-term holder, but for some, even that downside will put some investors off.

Since issued, the MRP share price has fallen, and today can be bought for $2.17 per share.

The fall in market price would only be a realised loss if you sold at this price, but utility investors should be long-term holders and only concerned about their entry price.

However for buyers at the latest price, the dividend yield would be higher - 6.30% pa tax paid.

One of the features of the Meridian offer will be even greater 'enhanced returns' in the initial holding period. You will get the full dividend return even though you will have only paid for half of the price you commit to. For yield investors, this will be an attractive incentive.

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David - you seemingly have not factored in the cost of financing (opportunity cost) the MRP position and the likely margin call demands if the shares were acting as collateral to secure the loan.

No. This is the practical comparison for someone who has/had money in a TD and who invested in MRP shares as a long term utility investment and as an alternative to a TD. The opportunity cost is clearly set out as the alternative. You give up $267 to get $684.
(Buying shares on margin is only a strategy for an investor who trades shares and who has arranged margin facilities. This story has nothing to say to such short-term share traders.)

Last line stating $25,267 in the bank versus $22,184 in the share portfolio would have been a more complete assessment.
And of course what is the more realistic price for those MRP shares? As it is not unreasonable to assume in the long run they will find that price.
Think Monopoly .. you never know when you're going to land on Boardwalk and if you haven't got the cash, no one is going to want your utilities for face value :-).

It really seems to depend on who wins the election...Nats OK,, you are sweeeeet.
Labour with Green's expect regulation changes and profits way down....
then both, PV panel etc impact.

Useful analysis David.   That cut through lots of the hype for me.  There are indeed people who have money and seek to invest it.  Fairly plain and simple stuff.   And for whom trading/derivative/margin/hedge/leverage moves are not what it's about.
I have tremendous respect for Stephen Hulmes knowledge and I have learned lots from his comments.  But it's also interesting that he assumed that margin etc was the game for everybody.  

What would it cost me to be in the David Chaston business...? I see some solid growth coming for this site as the financials out there get a bit ragged...c'mon Davy go public...!

Should add ,shares may go up or down in price and you may lose some or all of your initial investment.
I tried to indicate as much to Chaston with my margin call example - borrowing to buy shares on margin keeps the investor alert to that which you note ostrich - too many employing the Chaston ideology place dud certs in the bottom drawer and hope for better days - margin calls bring reality into focus and generally force an early capital protection sale. Lost equity capital is rarely replaced with income in a timely manner.
The risk managers always shut losing trades down very quckly when I worked as a professional - if it doesn't work immediately there are better deals to be done elsewhere.

Mr. C , you are indeed wise beyond your tender years .... Yes indeedy , the Meridian float is a boon for folk wanting a healthy dividend yield , fully imputed . And , as you explain , the investors' get a full share's worth of income , even though initially they only stump up a half of the share's price ....
... compared to the TD , it's a no brainer ... not just in the first 137 days , but forever ...
As time goes by , Meridian's profits ought to rise at least in tandem with the CPI , if not more ... and their dividends and share price will get a corresponding boost ...
... whereas the TD , the interest will vary with time , but there's no chance of capital growth ever ... Zilch !
Yes , Mr. Key is a benevolent gentleman to offer us this opportunity to share in the government's good fortune ....

Yes , Mr. Key is a benevolent gentleman to offer us this opportunity to share in the government's good fortune ....
And given he is selling assets which were not his but belonged to all New Zealanders (whom he is supposed to represent), he is by definition being the very opposite of generous to all those New Zealanders who will no longer own the companies.

The government retain a controlling stake , 51 % , of each SOE floated .... this is an infintely better deal for all concerned than the 100 % sell downs by Mr Roger Douglas during the wonderful era of Lange/Douglas reforms  ...
... don't whitter & whinge if off-shore investors snaffle those opportunities which you spurned !
" Fill yer boots " , Mr Stephen !

It is a 51% better deal than selling 100%, and a 49% worse deal than keeping 100%. Not too much infinity either way. Plus we have had 30 years of experience to understand the very clear downside. Douglas had the admittedly not great excuse that we didn't yet know better. 
By the by, even if I volunteered to buy the whole 49% in theory available, he would politely decline, as he has very clearly promised 20-30% of the float to foreign investors. The clue is in the line that they expect 85-90% of the company to be in New Zealanders' hands after the float. The amount is predetermined, and has nothing at all to do with how much I might offer to buy. Just another sleight of hand at which this government is somewhat expert.

Isn't there a great big crocodile lurking in this swamp?
What if migration continues unabated, population increases to 6 million and growing and the main power generators have to raise a whole heap more capital to develop new and replacement assets to meet increased demand, and hit the share-holders up for some $6 billion in new capital - phew that's $3 billion the government doesn't have to find - can feel it coming - about 4 or 5 years time - gotta plan ahead

What if " Men in Black " is not fiction , but a documentary ... and the aliens need to stick probes up our bottoms to understand the inner machinations of the human mind ... and these probes cause an excessive drain on the electricity grid ...
... you'd be well pleased to own those Meridian shares then , wouldn't you ... you'd be begging , " Yes your slimey Betelguesian  repugnantness , please give me more ! " ....
No need to thank me , just pointing out one of many other posssibliities for your ediifcation ...

....well that would be good for shareholders.  The generators could sit back and charge increasing amounts for the increased demand.  The generators are under no obligation to increase capacity...and there's b#####  all hydo oppurtinity left... all the cheap one's are developed.

But .. but .. but .. see .. there is the problem .. when the government introduced the revaluation of assets method of pricing, and amortisation of those assets, the additional revenue should be set aside in a sinking fund .. and so it has .. that works so long as the reserves set aside are preserved .. and while the govt has been extracting those cash reserves in the form of dividends .. that works so long as the govt remains the sole shareholder .. but .. but .. the govt has sucked that sinking fund out .. and now sells the assets .. without the sinking fund reserves .. that should be sitting there .. suckers

The point is a good one, and KiwiRail was perhaps the best example to date, where Messrs Fay and Richwhite educated us all on how leveraged revalued assets worked, and how we had to collectively pick up the pieces if we still wished to have a functioning railway, after they'd swanned off with the capital.  In the current 100% model, if extra power needs extra investment that certainly becomes more complicated with mixed ownership, where in 100% government ownership, given the government always has the lowest cost of funds in the market, it can choose to invest if the needs are there. 

 even though initially they only stump up a half of the share's price ....
JK, the Harvey Norman of the NZX.

... yes he is ... so glad you agree !
About time the NZX had a shot-in-the-arm .... and these SOE's are just the ticket ...
.. we desperately need to demonstrate to Kiwis that's there's alternative investments to just owning rentals in Auckland !

.. we desperately need to demonstrate to Kiwis that's there's alternative investments to just owning rentals in Auckland !
Reasonable enough. There are already plenty of options on the NZX, or with very little effort, on The ASX. If the government were to spend say $5 million on advertising the benefits of such investments to the people, I'm sure the message would be well understood. Am very confident our very own David C would help promote such an idea for only a modest share of the $5 million. That would be a lot cheaper than the hundreds of millions going on selling the assets.

Actually we need to explain to those folk, that any 'investing' is parasitical on someone, somewhere down the chain, using fossil energy. In a nearing zero-sum game, if you 'win', it's at the expense of someone else. There seems to be an across-the-board need to deny this.

its not parasitical.  its the opposite of parasitical.

parasitical is expecting someone to hire you and pass on your cost-of-living to consumers.

investing is retaining resources (in most cases converted to liquidity form, then traded) then passing on those resources to suppliers of goods and services enabling them to team together collectively to fufil needs and wants.
what is worse is not to build up such a collection of resources that in your old age or injury, that you have nothing of value remaining once your labour or skillset is not in demand.

form above: re:$5mil for advertising.
you work in advertising huh? looking for a freebie?

Money better spent in education.
Why do our councils not invest in NZX if it's such a NZ-good ?

Because they're socialist driven from debt!  Why debt?? why do they borrow from banks, at our children/future increased expense, to provide the needs and _toys_ for their area.  Why are they not required to act with prudence??
Spend that $5mil in teaching NZers to invest and to invest the nest egg in (diversified) core performers, and how keeping that core operation supplied with funds helps grow the country and their own pockets while improving life.   Worked for Buffet might just work for socialists of this country hopefully before they spend us broke

What you are describing is the same thing, actually worse.  "growth" is a misnomer, what it actually is is a word for consume and waste non-renewable resources, faster.  In effect the last two generations have used 1/2 the world's non-renewable resources, and in fact all the cheap high quality stuff.
but you clearly dont get that......and with such political blinkers I suspect educating you on this wouldnt suceed, water off a ducks back as it were.

Stephen : The NZX is still a shadow of it's former self , prior to the 1987 correction ... we've never full recovered from that point ...
.. the greater the sheer number of companies listed on the NZX , and the greater the range of industries represented , the better...
Anything to wean us off the fixation with property .. ...

leaving no money on the table like the MRP IPO is really going to encourage them..yeah right.

Trouble is Gummy is that the financial services industry is it's own worst enemy for encouraging any interaction with it.   Every top 10 has a story which illustrates that somebody is transferring wealth out of investore pockets and into the pocket of the financial services industry.  And it's legal usually.
A big cause for the interest in property is because the investor can see it, control it and enhance it with their own skill. 

KiwiSaver is the biggest transfer of money from investors' pockets into the financial services sector ever seen in NZ !
... compared to the investing on the NZX , KS is low grade bang for your buck ....
Getting folk's tuned into direct share ownership is the goal .... awakening their entrepreneural spirit , which fell asleep soon after David Lange shut-down the Rogernomics reforms ....
... and just as we're on the cusp of weaning Kiwis off the governmental teat , along comes rah rah Cunliffe with his lurch to the left , freebies for all , and all the welfarism trash policy that Michael Cullen used successfully to sucker voters in ...
The NZX is capitalism in it's purest , finest form : Long may if rain profits upon us , one and all .

David, I agree with you assertion that MRP shares a better than Bank TD's by a country mile, and at least my money is actually working directly for me and not for an Aussie Bank .
I still dont understand the Kiwi aversion to listing portions of public assets , I see the ROYAL MAIL in the UK is going to be privatised .
Just how Kiwis would react to that idea here is anyones guess

As it happens, listing part of NZ Post would not worry me at all.
It is the power companies with irreplaceable assets, a massive competitive advantage of free marginal cost power, and a medium term significant strategic asset if you believe oil will become progressively more expensive, that I absolutely balk at.

@Steven L.. I accept your point that power generation is strategic , buts thats exactly why I wanted a slice of the action and bought MRP shares .
Here's our  thinking in the decision making process 

  • My wife and I wanted the steady income from such investments , we are net taxpayers,  and dont ever want to be a burden on the state.  
  • MRP provides some asset diversification to our very normal investment portfolio, which is overwight in property. .
  • We had funds sitting in the ANZ getting 2,5% , so MRP is good for us as our income from this money  has almost trebled.  
  • I dont see Power generation as a sunset industry , we will need conventional  power for the next  generation (25 years) at least 
  • MRP has good assets and low debt levels , they are not about to collapse like Hanover Finance , et al
  • By buying MRP shares , the NZ Government is my busines partner, it ( MRP) will be well managed and without the traditional conflict between the founders and their big ego's,  and the providers of Capital 

For what it's worth I actually think the power companies are good long term investments for all the reasons you and David Chaston highlighted, hence my reluctance for the government to sell in the first place. They still have not made a good argument for doing so in my mind.
But if they are determined to sell, then I am perfectly happy that you have chosen to invest in some of the shares, and won't remotely hold that against you.

Good long term, yes more so than many other things I suspect, bear in mind no where is safe.  The problem is paying out too much $s for the shares....Its a guess its a case of where can I lose my least capital.  The human aspect is of course the biggest will ppl act/panic when it dawns on them that many shares are worth a lot less than they are so called "growth" shares....or ones that have huge p/e ratios....
Going to be interesting to watch this shake out....

In the worst case if you lose 90% of the "paper value" but still have enough income off them to eat etc, thats going to be a win.

I confess to being surprised by the decline in the MRP share price. I have not seen any analysis of who is selling. Does anyone know? Is it the pros on the losing end of a trade and bailing out as Stephen Hulme postulates or is it the mums and dads who have got spooked?  ( Disclosure:   I do own a few shares and am happy with them but I would rather have bought them at $2.17 than $2.50 )
The dividend yield is very good and if comments from the board about rethinking their capex mean anything could go higher. The reported profit was above forecast. One of the unknowns was the new geothermal station to be commissioned post float but again reports suggest it is performing above expectations. The institutions must have thought it was worth $2.80 to have pushed the price above $2.50 on debut. I dont really understand why the price has tanked compared with say Z Energy which is also a dividend play but I would have thought more risky.
The comparison with term deposits is interesting. If the alternative investment was a traded bond with a coupon of 4.5% pretax  and five years to maturity and it was possible to move to an investment with similar risk profle ( MRP shares ) at 5.47% tax paid the value of that $25,000 bond would be well south of $20,000. Used to know how to work that out .
I still think MRP will be fine and there is the little kicker of the loyalty bonus for those who hang on for a while. Just wish I knew who was selling and why.

My interpretation of the MRP price is that it has been moving towards equivalence with the price of Contact shares (allowing for number of shares in circulation etc). If so, it has got a little way more to drop.

Q. Does anyone know?
A. Yes
You should not be surprised
This was discussed at length here back in April
And again earlier this week
Did you consult an "independent" financial advisor before you bought?
A suggestion. Listen to Stephen Hulme more often, more carefully

NZ post is losing money hand over fist, selling it since there is true competition with emails/faxes/couriers etc is most acceptable to me.

I think this analysis is a little misleading. You can't take the final dividend payment and assume this is the annual return you would make holding MRP shares.
There are two dividends per year, interim and final with the latter normally being larger ). Total payout for this year is 12c/share (4.8c interim and 7.2c final) which would give an annual return on 4.56% after tax if shares were bought at IPO. This is 0.81% lower than quoted above (but still much better than Rabo's return at 2.85%).

You just have to let the irony pass kiwimm-
I did when confronted with Chaston's gibe;
This story has nothing to say to such short-term share traders.
Best to never confuse analysis with promotion.

Fair point kiwimm. But the interim 4.8c was all paid to the Government as 100% holder then. And the Company has signalled that the higher rate is what they are targeting in the future, in fact rising even further. I still think at least 7.2c twice a year is the right way to look forward on this.

I would be surprised if the dividend increases from 12c to 14.4c (20%) in one year given that the payout is based on net profit after tax. Even the government wouldn't try to push up prices that much.
If you are comparing to an imagined long-term payour, then a 5-year term PIE savings account at 5.3% which will return 3.82% for a higher rate tax payer would be a better comparison.