In Search Of Great Dividends: New Zealand Telecom

Dec.11.11 | About: Spark New (SPKKY)

By Mark Bern, CPA CFA

I believe that New Zealand Telecom (NZT) represents a decent long-term buying opportunity after its spinoff of Chorus to shareholders. The “demerger” will allow NZT to focus on its fixed-line and, more importantly, its 3G Mobil. The company recently announced an agreement to support and sell the Apple iPhone. Assuming that the popularity of this phone will carry over into new markets, I expect the higher margin smartphone business to boost revenue growth for NZT.

I also like the dividend. But that leads me to a rather comical story. I wanted to be sure to this one right because I had relied on two different quote systems for information for another article on a foreign-based company ADR. A reader pointed out that my information was incorrect so I looked the dividend up in several other places and got completely different information from each one.

Of course, the only source to trust is the company’s web site for accurate information on dividends. I went through the process, just out of curiosity this time, of checking four different quote sites for the NZT dividend and got four different answers. Yahoo! Finance reported the dividend at $1.06 yielding 13.5%; Motley Fool reported $0.47 yielding 9.1%; Value Line reported $0.44 yielding 5.7%; and Seeking Alpha reported $1.31 yielding 16.54% % (I liked that one the most). But when I went to the company’s site to find the truth it provided another riddle. The regular dividends paid for 2011 was in US$ was $0.78 yielding 9.7%, but the company paid a special dividend in the fourth quarter that brought the dividend to $0.87 yielding 10.8%.

Since the company has not been in the habit of paying special dividends in prior years, I will use the rate of 9.7%. Wasn’t that fun? Those rates are all based upon the closing price of the stock ADR on December 9, 2011 of $8.08. But even that number was not the same in all the different quote systems! The range was only 2 cents, though, so I just went with the one that came up all but one time. ADRs, you’ve got to love them.

One thing I don’t like about NZT is that the dividend has been coming down over the past three years. I think that the company has found the bottom for now, and will restrain its increase next year, and that should bring the payout ratio down to the mid-60% range which is probably conservative for a telecom. After that I think we can expect to see annual dividend increases averaging around five percent.

It looks like their capital expenditures should be lower once the company completes its roll out of fibre-to-the-node. That should free up cash flow for dividend increases and maybe stock buy backs. In any event it should help provide management with more flexibility.

NZT isn’t a world dominator, but they have an entrenched position, a great dividend, and some potential growth. Not a bad combination. Did I mention that I liked the 10 percent dividend?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.