Genesis may struggle to increase turbo charged dividend, says Forsyth Barr
Genesis Energy, New Zealand's largest energy retailer, is expected to be a strong initial performer when it lists next month because of its attractive near-term dividend yield, but may struggle to offer dividend growth over the longer term, according to brokerage Forsyth Barr.
The government plans to sell between 30 to 49 percent of the company at an indicative offer price of $1.35 to $1.65. A "turbo charged dividend" implies a gross yield of 13.5 percent to 16.5 percent in 2015, making Genesis a "very attractive offer on first glance", Forsyth Barr analysts Andrew Harvey-Green and James Bascand said in a research note.
Genesis is the last company on the block in the government's partial-privatisation programme ahead of September's election. Unlike last year's offers by MightyRiverPower and Meridian Energy, Genesis plans to maintain a dollar amount of ordinary dividend payments to provide investors with consistent returns even in periods of weaker earnings. Still, the estimated 16 cents per share dividend in 2015 is as much as Genesis can afford without increasing debt levels, the analysts said.
"The high dividend is what stands Genesis apart from the other gentailers and in our view Genesis has pushed the dividend harder than its peers," according to Forsyth Barr. "The yield is impressive and cannot be ignored, albeit we believe growing the dividend will be a challenge. Any hiccup in earnings....and Genesis will be borrowing to pay the dividend - not a great look in our view."
The company's gearing ratio, measured as net debt divided by net debt plus equity, is expected to increase to 35.4 percent in 2015, from 34 percent in 2013, the brokerage said.
In addition to the dividend, investors who hold the shares for a year will receive a bonus share for every 15 they hold, up to a maximum of 2,000 shares, adding 6.7 percent to the initial yield, the brokerage said.
Forsyth Barr expects Genesis to be held alongside Meridian as the two would balance each other in a portfolio. Meridian has large hydroelectric interests and performs well during years of high rainfall while the thermal output of Genesis performs well in periods of low water.
The brokerage will rate Genesis "outperform" if the final offer price is $1.54 or below and "neutral" if the price is $1.55 or more. Genesis is scheduled to list on April 17.