Rivella There is for each economoc sector, and each business...

Rivella

There is for each economoc sector, and each business therein, an optimal mix of debt and equity, and this is linked to an optimal dividend payout ratio. Although selecting those optimums is not easy (probably impossible in an objective sense), by definition, to function below those optimums is suboptimal. Nobody would expect Westpac, for instance, to fund its business 100% by equity.

I worried about SIV six or so years ago when I was considering it, because it had both high debt and a high dividend payout ratio, but I noted when I looked today that its payout ratio is currently about 50%, a more comforting number. I notice too that SIV's share tally has increased over the years, so without delving into the matter, I assume it has had a high election ratio for its DRP over the years, and hence its actual dividend payout has been lower than 50%. In spite of the share tally increase, the significant metrics per share like EPS and DPS have performed well. SIV has been around long enough to have learned what debt/equity ratio and dividend payout ratio works for it. TGA investors who worry about TGA's increasing resort to debt should study SIV, and relax, and be comforted by the SIV-like nature of TEF (Thorn Equipment Finance). One wonders why TGA's management were so slow to horn in on the small business market.

TGA for years had a dividend payout ratio of 50%, which it increased when it had to lower EPS because of impairments and other one-offs. I suspect that as soon as it can do so without slashing DPS, Management will edge back to a 50% dividend payout ratio.

In past years, when TGA's debt/equity ratio was much lower, I am on record of having posted on HC that its gearing was too conservative for its style of business, and I cross referenced FXL and SIV as examples of similar companies with higher gearing, and I added words to the effect that if a nobbled horse was doing well at the races, one should acquire that horse, and take the nobbles off to let it run in its best circumstances – my logic for backing TGA. TGA has been slow to use more debt, and it indulged in a few wealth-destroying initiatives, so although I have done well enough over the years from my TGA holdings, I would have done better in SIV. My current near-future perspective for TGA is bullish, and this is based on it becoming more like SIV, and avoiding adventurous cockups, a la NCML.