Thursday, January 27, 2011


Key said Treasury would now go away and analyse whether it was a good idea to sell up to 50% of the three power generators (Meridian, Genesis and Mighty River Power) and Solid Energy through stock market floats to New Zealand investors..

The theory is that for the sale to make immediate sense then the dividends given up would have to be less than the interest costs of the debt not incurred by selling the asset.

A quick tally of the dividends received and the equity invested suggests it's a line ball call about whether selling the asset is better than borrowing.

Meridian Energy returned NZ$353.5 million in dividends to the government in the year to June 2010 and shareholder equity was valued at NZ$5.07 billion, which suggests a raw dividend yield of 7%. It reports its return on average equity at 3.9% and its underlying return on equity of 19.8%. Here's the annual report.

Mighty River Power reported an average return on equity in the year to June 2010 of 9.7%. It paid dividends of NZ$286 million and shareholder equity was valued at NZ$2.688 billion, which suggests a raw yield of 10.6%. Here is its annual report.

Genesis Energy paid dividends in the 2010 financial year of NZ$39 million and shareholder equity was valued at NZ$1.448 billion, giving a raw dividend yield of 2.7%. It says it achieved return on equity for the year of 4.9%. Here is its annual report.

Solid Energy paid dividends of NZ$54 million in the 2010 financial year on shareholder equity of NZ$436.8 million, delivering a raw dividend yield of 12.4%. Solid Energy and reported profit as a percentage of shareholder funds at 15.4%. Here is its annual report.

In total, the four SOEs potentially up for sale generated total dividends last financial year of NZ$732.5 million and shareholder (government) equity stood at NZ$9.642 billion. This implies a combined (and very raw) dividend yield of 7.6% last year.

Does this compute?

Yet the government is currently having to pay around 5.5% for the new debt it is selling, mostly offshore.

So on the face of it the government is a net loser by selling half of these state assets and avoiding having to raise new debt.

The Treasury will no doubt do a much more sophisticated analysis, but this is a question the government and voters will have to ask in a very hard way before deciding to go ahead with asset sales.

Simply stating that asset sales are a good idea for making these companies more efficient and giving investors on the NZX more options will not be enough.

Lots of hurdles would have to be jumped. For it to make financial sense, the government would have to sell the assets to the public (in theory the New Zealand public) for book value or better and be expecting long term interest rates to be much higher than they are now.

Meanwhile what's the best way to avoid more foreign debt?

The most obvious, and least politically acceptable, way for any government of whatever shade to reduce new debt is to run much smaller government deficits.

That means cutting into entitlements or core spending, including health, education and social welfare.

That means attacking the elephants in the room of Working for Families, free student loans, social welfare benefits and health spending. Or it means increasing taxes, particularly income taxes.

Wednesday, January 26, 2011

Friday, January 21, 2011

Wednesday, January 19, 2011

Tuesday, January 11, 2011


hat tip to the one like heylady