@Patient, It's a bit of a seminal moment in the company's...

@Patient,

It's a bit of a seminal moment in the company's history, I think.

CDP's Contributed Equity has remained unchanged at $187.934m for as far back as I've got records (which is as far back as 2000). It is one of the only companies I know which has kept its Issued Capital in such perfect check for such an extended period.

However, that is now changing with the Board being forced to flick on the DRP switch in order to conserve capital.

That they are resorting to a DRP even after the dividend has been re-based down to 23cps pa confirms that the practice of the past seven years of funding the distribution through increasing borrowings, are well and truly over.

And an annual distribution of 23 cps is still higher that what I think is affordable based on the organic surplus capital generation of the business.

Since the major 2012/2013 refurbishment, Operating Cash Flow has averaged $26m pa (excluding FY2020, of course; in which the second-half was heavily Covid-impacted), and the capital requirements of the business are running at around $12mpa currently.

So that means Free Cash Flow available for distribution is around $14m pa, equivalent to 20cps. Hence the DRP being required for anything above that amount.

Trouble is, with such a large DRP participation, it means that shareholders who do not participate in the DRP will experience a relatively high rate of dilution, viz., ~3.5%pa (assuming 20% of minority shareholders also participate in the DRP, along with the major shareholder).

I suspect that the penny might now drop for some investors who are still of the view that the fall in distribution over the past 18 months, from annual distributions 40c or 38c in preceding years, was merely temporary and that there would be a return to higher levels.

For distributions of 20c pa, which is what I believe is sustainable from an organic capital generation point of view, the dividend yield works out to 4.3%, which I think is not that appealing, especially in a rising interest rate environment.

At 23c, that works out to a dividend yield of 5%, which probably represents fair value, for those investors willing to overlook the DRP dilution (I'm not one of them).

But, either way, what it certainly isn't is a >8% yield that some investors might still be thinking it is.

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