Ann: Underwriting of Dividend, page-7

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meghotcop

645 Posts.

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10/10/20

17:07

Post #: 47999184
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Thanks Marcus A. I am glad you checked my numbers, and I agree with them and the rest of what you posted.

Originally posted by marcus A: ↑

Hi Meghotcop,

According to the 'Notification of dividend/distribution' the DRP/BSP discount for the upcoming distribution is 2%. Assuming the 5 day VWA price of shares averages around the current price of $32.21, the DRP price will be $31.57, so dividing the total dividend of $31.53m by the DRP price will give you just shy of 1m new shares, or approx 1.25% of the 79.83m shares currently on issue. Taylor Collison will collect $315,330 for underwriting the DRP and will have to purchase any shortfall at the same price as DRP participants (which will be dumped on the market ASAP).

I agree that a company retaining dividends can be a good thing if their Return on Capital outweighs their WACC, however as we have a dividend imputation system in Australia (which does not apply to Berkshire Hathaway being US based) it's best if companies do not accrue large franking credit balances that they cannot monitise, as their shareholders can, particularly if their holdings are in a low/no tax structure such as a SMSF. This is where capital management actions such as special dividends with discounted DRP's (such as ARB's in 2014) or off-market buybacks can materially improve the RoI for shareholders while making the capital structure of a company more efficient, improving the companies' RoE, particularly if they can borrow prudently at interest rates well below their RoC. This may also help to reverse ARB's falling RoE which has been in pretty constantly decline for the past 10 years.

Holding lots of cash on your balance sheet is simply inefficient capital management, it needs to be invested, preferably into something that improves a companies' RoC. In my opinion ARB have sufficient strength in their balance sheet with $372m in net assets to take on a reasonable amount of debt ($150m in borrowings would amount to a debt - equity ratio of .4), which along with their currently strong market cap and share price, would allow them to swallow a very large acquisition if they were to offer a combination of cash and script. This being the case I don't really see the sense in handing $315k to Taylor Collison to underwrite the DRP in the vague hope that something attractive turns up to buy.

I guess my main point is that we can be excessively risk averse, particularly as we look out of our foxholes in Melbourne...

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ARB Price at posting: $32.21 Sentiment: None Disclosure: Held
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Last $42.48		Change -0.430(1.00%)		Mkt cap ! $3.497B

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