Meridian feels the power
High-yielding Meridian among utilities feeling love from investors as cash rates worldwide sink ever lower
As central banks rush headlong into a race to the bottom with their interest rates, New Zealand’s power generators have been thrust into the limelight.
At nearly $12 billion, Meridian has emerged as the market’s biggest company by market capitalisation, eclipsing the former number one stock, a2 milk, by about a billion dollars.
Meridian’s shares have risen by about 50 per cent in value over the past 12 months against a very respectable 16.5 per cent increase in the S&P/NZX 50 index over the same period.
The other power companies are not doing too badly either — Genesis, Contact, TrustPower and Mercury have all had strong runs, gaining between 32 to 39 per cent.
The Reserve Bank’s official cash rate sits at 1.5 per cent and expectations are running high that it will cut it to 1.25 per cent in August, with perhaps another to follow before the year is out.
Official rates are declining around the world and in some countries, bond yields have gone negative, so it shouldn’t come as any surprise that New Zealand’s high-yielding power companies have been singled out.
“What we are seeing globally is a hunt for yield and because they are relatively stable, high-certainty earnings businesses, they meet a lot of requirements for people trying to enhance yield,” Harbour Asset Management portfolio manager Shane Solly said.
Meridian’s suitability is further enhanced by the fact that all its energy comes from renewable sources, but are the shares overvalued?
“You could argue that they are expensive on a theoretical basis, but finance theory has been pushed aside for the time being,” Daniel Kieser, managing director at equity research company ShareClarity, says.
“Many investors simply compare what they could get from a savings account (2 per cent after tax) versus the dividends they could get from the power companies (4-5 per cent after tax), which is obviously still appealing to them.”
Kieser says investors should be mindful of “dividend cover” — the
amount of money the power companies make versus the amount they pay out as dividends.
“You generally want them to make more than they pay out, otherwise they need to borrow to keep paying their dividends and this cannot last forever.
The good news is that most of the power companies do make more than they pay out, albeit not by a lot.
“It’s been quite dramatic to see the power companies increase 50 per cent in the past year, even though nothing’s really changed with their business models, risk profiles or the energy sector as a whole,” he says. “Let’s hope interest rates stay low and the power companies don’t have any earnings shocks for a long time.”
Spark’s special dividend
Spark, which as been de-gearing its balance sheet over the last few years, may end its special dividend, brokers Forsyth Barr said. The telco has been returning the proceeds of divestments through a special dividend and the available debt within its A minus credit rating has been declining, it said in a research note.
“We believe Spark may take the prudent step to end its special dividend given our expectation it will not achieve the targeted cash flow coverage in FY2020, potential medium- term capital requirements and the diminishing balance sheet capacity beneath its A minus credit rating,” it said.
On an ordinary dividend only basis, Spark’s yield remained attractive and Forsyth Barr said any weakness on the back of a dividend cut would be a buying opportunity.
Over the past four years Spark’s dividend has been over 100 per cent of free cash flow funded by earlier divestments.
Napier Port looms
Broker reports circulating in the market have valued Napier Port in total at between $450 to $550 million.
With 55 per cent of the stock expected to be retained by the Hawke’s Bay Regional Council, that will leave a free float of worth about $200m.
Of that, about half is expected to be taken up by local investors with share allocations, leaving shares worth about $100m available to outside investors.
“It is going to be a reasonable, modest-growth business, but not a bad little business,” said one fund manager.
Napier Port, New Zealand’s fourth largest port by container volume, has said the share offer will mean it can deal with its congestion problem by building a new container wharf.
The IPO will occur on July 15, with an NZX listing expected in August.
It’s been quite dramatic to see the power companies increase 50 per cent in the past year, even though nothing’s really changed with their business models, risk profiles or the energy sector.
Daniel Kieser, ShareClarity