Ann: Brierty confirms final dividend, page-2

In my 19/08/2014 dated post I wrote in relation to BYL's low dividend payout ratio that BYL had announced that it had to spend $30M on the $300M RIO contract, and that it would probably use lease financing. The $30M was a rough BYL-stated number, because the Annual Report states, “For the mining operations at Western Turner Syncline, the Group has committed to purchase assets worth $26.5 million with these assets being delivered between July 2014 and February 2015. The majority of these assets will be financed using hire purchase agreements.” These are in effect finance leases, and if BYL is in a good cash position, it would be able to reduce the lease commitments if it wants to make itself financially more resilient.

The Annual Report also states, “The practice of the Group is to have around 25% to 35% of Net Profit After Tax (NPAT) available for distribution as dividends, with the balance being retained for funding ongoing growth.” I do not regard this statement to mean that a payout ratio of 25% to 35% is cast in stone. BYL had debt problems in the past, and the Brierty family lent BYL money to get through a difficult period, from which BYL has since emerged. I think the Bellamack contract was the main cause of the problem; it required BYL to front-end money that it only retrieved when plots of land were sold years later. There is no reason why BYL should long continue to set its payout ratio so low. NWH used 57% in FY2014, and it hinted that as it is in a strong cash position, it may increase this in future. I regard 50% as a rule-of-thumb payout ratio for healthy companies in this sector, and I think that in time BYL will move towards that percentage. Rapid growth can be toxic, so withholding 50% of NPAT should suffice to achieve optimal growth.

I thought that BYL might increase its annual dividend from 3c to 3.5c then upward to 4c and 5c in future, and that it would achieve this in .25c increments each half year. What I was unsure of was when it would commence that upward path, with 2HY2014 being the earliest start. It is interesting that the Annual Report states that BYL would pay a final dividend of 2c in 2HY2014, and in other places the same report states 1.75c. Maybe the person who wrote the first draft had 2c in mind, and that sentence was overlooked when on further consideration management decided on 1.75c, in the light of the $26.5 million leasing commitment and other initiatives that management entertains to ramp BYL up a tier to increase future EPS growth.

When I was investing in BYL over the past twelve months at just under 40c, my logic was that the yield including franking credits was (3c/40c)/.7 = 10.71%, and that both the EPS and the dividend payout ratio would increase over time, and hence as long as I held BYL, I would be amply rewarded, and that if I exited a few years hence, the SP would likely to have risen for three reasons – EPS increase, payout ratio increase, and Mr Market's yield requirement would decrease to less than 10.71% (or put another way, the PER would increase).

I read recently that statistical studies support the view that the combination of high yield and low payout ratio tends to deliver above-average SP growth. Actually, this is so patent that only somebody who has an academic imperative to produce a paper would bother to investigate the statistical support for the contention. The article is at http://www.tweedy.com/resources/library_docs/papers/WhatHasWorkedFundVersionWeb.pdf