Dividends, are they worth it?

[Value Collector]

hng049, just thought I'd add to the dividend story. This is a true story.

Back in the year 2000 there was an IPO called The Australian Pipeline Trust (ticker APA). The IPO was for $2 a share and I got my Mother interested enough to buy into the IPO. I bought some too.

At that time the distribution was going to be around 10% per annum, some of it was capital returns as well as income. Over the years it turned into just income and no more capital returns.

This is an infrastructure company and it has bought out other companies and has expanded over the last 15 years. It has also changed names and it is still ticker APA but it's full name is APA Group (Stapled Securities). It's dividends have slowly increased over the years. APA last traded at $8.68, not too bad going up from $2.

The dividend for the last 12 Months was 75.75 cents per share. That means that for shares that we originally paid $2 each for are now paying us close to a 38% dividend/distribution per annum on original outlay. My Mother never sold her shares, unfortunately I did, too early. With all the things that has happened like the Twin Tower attacks and the GFC she held through. Now in her very old age she is using those dividends to pay for her aged care. Dividends are very important in creating wealth.

Hey Bill,

I think you have done your maths wrong, apa didn't pay 75cents per share, from memory they pay around 38cents.

I have been a holder of apa since 2000 also, it's been a great dividends payer and seen great capital growth.

 

[Value Collector]

Hi Bill, that's a great return! I certainly understand more about dividends now. I just need to accumulate more shares for dividends to make a decent return. I've got about 40 years till retirement so plenty of time

Don't forget the power of compounding, using your dividends to by more shares in other companies is a great way to grow your investment portfolio.

Think of yourself as a business owner, when you own a portfolio of shares, you own a portfolio of businesses, these businesses earn money and every 6 months they send you a dividend which is your part of the profits they are paying you (after they have retained some to keep growing the company) you can then take this money and increase your holdings by buying more shares in your existing businesses or buying into other companies,

The thing with compounded growth is, at first it seems to take along time, but eventually you hit a tipping point and the growth suddenly seems to pick up steam and the dividend checks grow like crazy.

 

[shouldaindex]

I think I read one of my favourite posts of all time on here, basically said:

- He's a part owner of 300 of the best businesses in Australia, doesn't have to do anything and automatically gets to buy more year after year for free.

- When someone gets the sack for losing a company a lot of money, he couldn't care less as it doesn't really matter.

- And just to prove the track record, any money invested 60 years ago (9% ASX returns with dividends reinvested) would be worth 170 times the amount today or $10k = $1.7m

 

[Bill M]

Hey Bill,

I think you have done your maths wrong, apa didn't pay 75cents per share, from memory they pay around 38cents.

I have been a holder of apa since 2000 also, it's been a great dividends payer and seen great capital growth.

Hey Value Collector, you are right, my bad. APA use to pay distributions every quarter and I forgot they went to 6 Monthly distributions. What I did wrong was added up the last 4 distributions instead of the last 2

The latest distribution that was paid was at 20.5 c per share (on 16/09/2015) The next payment which was announced last week will be on 16/03/2016, it will be 19 c per share. That will make it a total of 39.5 c a share. So that means that for the original outlay of $2 per share, that initial investment is now paying you 19.7% per annum, still not too shabby + the share price has more than quadrupled (currently $8.42).

Thanks for pointing that out VC, I would hate to mislead anyone.

 

[luutzu]

Hey Value Collector, you are right, my bad. APA use to pay distributions every quarter and I forgot they went to 6 Monthly distributions. What I did wrong was added up the last 4 distributions instead of the last 2

The latest distribution that was paid was at 20.5 c per share (on 16/09/2015) The next payment which was announced last week will be on 16/03/2016, it will be 19 c per share. That will make it a total of 39.5 c a share. So that means that for the original outlay of $2 per share, that initial investment is now paying you 19.7% per annum, still not too shabby + the share price has more than quadrupled (currently $8.42).

Thanks for pointing that out VC, I would hate to mislead anyone.

Just nit picking here but probably wrong to compare dividends now to original share price. It's nice and feels good but maybe we ought to do some compounding then see if the dividend now is at a reasonable yield to what original capital, if invested and earn x% per year is now worth y etc.

Now let's rain on this APA parade... maybe not, but can you guys tell me how APA keeps paying dividend above its earnings all these years?

I haven't read their Annual Reports yet, just downloading for a looksy but from MorningStar they seem to be paying higher dividends than their reported earning each year for a long while now.

Saw they note it's from "normalised" operating cash or something on their website... Anyway, will take a look.

 

[Value Collector]

Just nit picking here but probably wrong to compare dividends now to original share price. It's nice and feels good but maybe we ought to do some compounding then see if the dividend now is at a reasonable yield to what original capital, if invested and earn x% per year is now worth y etc.

.

If you are comparing an allocation of $X in APA shares in 2000 to an allocation of $X into term deposits or some other cash investment, I think its fair to compare the current return to the original cash out lay, especially if you are a retired and spending the dividends.

eg. I retired person who put $100K into a term deposit and spent all the interest would currently have a $100K term deposit earning say $2000 or $3000 interest.

The APA investor would be receiving about $19,000 in dividends, on top of income the APA investor also has the benefit of his original cash outlay growing from $100,000 to over $400,000, that's a $300,000 gain which will be taxed at a 50% discount when its finally sold.

really holding APA shares since 2000 has meant your original investment has been producing over 10% in income for you, while your capital has been compounding at about 10%, its been a pretty good investment over time.

Now let's rain on this APA parade... maybe not, but can you guys tell me how APA keeps paying dividend above its earnings all these years?

I haven't read their Annual Reports yet, just downloading for a looksy but from MorningStar they seem to be paying higher dividends than their reported earning each year for a long while now.

APA is an infrastructure company, it owns huge amounts of assets from which it can make a depreciation charge against its earnings, the depreciation charge is actually much higher than the amount that they actually have to spend to maintain their pipelines etc, the result is reported profits are much lower than the actual free cash flow they are generating.

eg. To build a pipeline involves all sorts of design costs, earth works, environmental impact studies, legal costs, negotiations with landholders, actual construction costs etc all these costs are rolled up into the capital value of the pipeline system, and will be written off over the years against earnings, however once its built the cost to maintain the pipe is relatively small, which means cashflows will be higher than reported profit.

 

[shouldaindex]

In Australia there is franking value that can add 3% just because someone decided you could on a 7% FF Dividend.

There are very few free lunches like that, where you can outperform an international counterpart by 42% doing the exact same thing, with no added risk.

But taking tax out of it, there's no difference between a stock that returns 7% through dividends or capital appreciation. In the example didn't APA make more from capital appreciation anyway?

 

[Value Collector]

In the example didn't APA make more from capital appreciation anyway?

Not sure, but maybe.

I guess if you wanted to do a realistic comparison you would have to add compounded interest to the dividend you received, I guess if you used the dividend to buy more apa shares every six months, then the capital growth from the dividends you reinvested would really add a lot of extra growth.

But you are completely right with you point about dividends vs capital growth, it's the total shareholder return that's important, in some cases it's best for companies to pay out profits as dividends, in other cases companies have good ways of investing dollars they retain, and it's best for them not to pay a divvy, and just put the profits back to work in the business, which in turn leads the company value and share price to grow.

Look at the worlds biggest and most profitable company's, they would never have grown to that size paying out 100% of earnings, but on the other hand you have company's that don't have options to invest money and earn more than 10%, so you want these companies to pay out excess cash.

 

[luutzu]

...
APA is an infrastructure company, it owns huge amounts of assets from which it can make a depreciation charge against its earnings, the depreciation charge is actually much higher than the amount that they actually have to spend to maintain their pipelines etc, the result is reported profits are much lower than the actual free cash flow they are generating.

eg. To build a pipeline involves all sorts of design costs, earth works, environmental impact studies, legal costs, negotiations with landholders, actual construction costs etc all these costs are rolled up into the capital value of the pipeline system, and will be written off over the years against earnings, however once its built the cost to maintain the pipe is relatively small, which means cashflows will be higher than reported profit.

And the taxman let them get away with it?

I'm sure you and Bill and others have look at it and know it best. But yea, as long as they are maintaining the assets properly and doing it for less than the allowable charge on the account; not cutting back on maintenance, increase operating cash but still claim the less profit through depreciation/accounting.

I guess pipelines are just a pipe in the ground with a few pump stations here and there, with Australia being pretty much Earthquake free so there won't be much cost to maintain the assets... but bear with me... say in the longer term, like another 10 years or 15... wouldn't all or most of these pipes need to be replace or heavily upgraded?

That's when all these depreciation charges will then come calling at once.

What's the design life expectancy for these pipes you know?

 

[Value Collector]

And the taxman let them get away with it?

I'm sure you and Bill and others have look at it and know it best. But yea, as long as they are maintaining the assets properly and doing it for less than the allowable charge on the account; not cutting back on maintenance, increase operating cash but still claim the less profit through depreciation/accounting.

I guess pipelines are just a pipe in the ground with a few pump stations here and there, with Australia being pretty much Earthquake free so there won't be much cost to maintain the assets... but bear with me... say in the longer term, like another 10 years or 15... wouldn't all or most of these pipes need to be replace or heavily upgraded?

That's when all these depreciation charges will then come calling at once.

What's the design life expectancy for these pipes you know?

It's not that they are "getting away with it", it's how depreciation is claimed on most things, but also the government wants company's to invest in infrastructure, so often they will offer sweet accounting deals as an incentive to get infrastructure built, eg allowing construction costs to be written off over shorter time frames etc.

Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction, but yeah one day the gas fields will be exhausted and the pipelines will be worthless, but it would have paid for itself dozens of times by then, and the cashflow produced will have been invested in other infrastructure investments along the way, as well as funding dividends.

 

[Smurf1976]

Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction

Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.

Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976.

Launceston got over 130 years out of the original gas system before it became uneconomic. And it wasn't actually worn out then, just became uneconomic (no natural gas in Tas at that time, so the problem was the cost of gas as such not the pipes).

Plenty of old bridges still in use right around the world. Same with rail.

Lake Margaret power station is 102 years old this year and Tarraleah is 78 years old (both are hydro plants in Tas). Both are still in full production (base load) today and they're running right now.

Parts of Hobart's water supply system date from 1860 and they're still in full use today.

Parts of the electricity transmission system built in the 1930's are still in use today. Indeed it's only a few years ago that some stuff dating back to 1916 was finally taken out of service.

So broadly speaking, big infrastructure does have a very long lifespan if properly maintained. Things which run at high temperatures, eg boilers and steam turbines, have a shorter life but it's still a few decades.

 

[Value Collector]

Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.

Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976.

Launceston got over 130 years out of the original gas system before it became uneconomic. And it wasn't actually worn out then, just became uneconomic (no natural gas in Tas at that time, so the problem was the cost of gas as such not the pipes).

Plenty of old bridges still in use right around the world. Same with rail.

Lake Margaret power station is 102 years old this year and Tarraleah is 78 years old (both are hydro plants in Tas). Both are still in full production (base load) today and they're running right now.

Parts of Hobart's water supply system date from 1860 and they're still in full use today.

Parts of the electricity transmission system built in the 1930's are still in use today. Indeed it's only a few years ago that some stuff dating back to 1916 was finally taken out of service.

So broadly speaking, big infrastructure does have a very long lifespan if properly maintained. Things which run at high temperatures, eg boilers and steam turbines, have a shorter life but it's still a few decades.

Hey smurf,

I thought you might be interested in this video, They remove a hydro electric dam that had been in service for 99 years, and return the lake back to its original condition of fast flowing river.

The hydro electric station was still operational, but they wanted to return salmon to the area and it became viable to replace the load with power imported via transmission line.

It's a great video.

[video]https://m.youtube.com/watch?v=HES_-dKUE9I[/video]

 

[luutzu]

It's not that they are "getting away with it", it's how depreciation is claimed on most things, but also the government wants company's to invest in infrastructure, so often they will offer sweet accounting deals as an incentive to get infrastructure built, eg allowing construction costs to be written off over shorter time frames etc.

Pipelines usually have a design life of 80years, but can last longer with good Maintenance, it's not like after 80 years they have to rip the whole thing up and rebuild, it just gets inspected and parts here and there that need work get work done, obviously as th system gets older it requires more maintenance though, but still nothing like the inflation adjusted cost of an original construction, but yeah one day the gas fields will be exhausted and the pipelines will be worthless, but it would have paid for itself dozens of times by then, and the cashflow produced will have been invested in other infrastructure investments along the way, as well as funding dividends.

So it's not a ponzi scheme then?

I have APA on the watchlist but never took much interest in it. Mainly due to the high debt level, the high price and didn't really think a utility could make that much profit or margin or growth. Guess it showed me I ought to make no quick calls.

Scanning their 2015AR and they claim 1300% shareholder return in 15 years? Or 19% p.a. average since IPO?

But yea, interesting... thanks guys. Will try to dig into it after a few look at Dick Smith and may have a proper opinion.

 

[luutzu]

Same with most major infrastructure. Roads, rail, bridges, dams / hydro. It costs an outright fortune to build but once it's built it doesn't cost much to keep it running and it has a very long lifespan.

Victoria still uses the original gas pipeline built for the old Lurgi (gas produced from coal) plant 60 years ago although it transports natural gas these days (the coal gas plant as such was scrapped once natural gas became available). SA still uses the Moomba gas pipeline (1969) and NSW is still using theirs from 1976.

Launceston got over 130 years out of the original gas system before it became uneconomic. And it wasn't actually worn out then, just became uneconomic (no natural gas in Tas at that time, so the problem was the cost of gas as such not the pipes).

Plenty of old bridges still in use right around the world. Same with rail.

Lake Margaret power station is 102 years old this year and Tarraleah is 78 years old (both are hydro plants in Tas). Both are still in full production (base load) today and they're running right now.

Parts of Hobart's water supply system date from 1860 and they're still in full use today.

Parts of the electricity transmission system built in the 1930's are still in use today. Indeed it's only a few years ago that some stuff dating back to 1916 was finally taken out of service.

So broadly speaking, big infrastructure does have a very long lifespan if properly maintained. Things which run at high temperatures, eg boilers and steam turbines, have a shorter life but it's still a few decades.

You sure know your power stuff Smurf.

So how would APA or any company properly maintain the pipelines?

Maybe check the pressure gauge for leakage or something like that? Now and then send some camera on a wheels down the line?

 

[Value Collector]

You sure know your power stuff Smurf.

So how would APA or any company properly maintain the pipelines?

Maybe check the pressure gauge for leakage or something like that? Now and then send some camera on a wheels down the line?

https://en.m.wikipedia.org/wiki/Pigging

It's called "pigging", there is probably a lot of other methods too,

Apa is actually pretty big in pipeline maintaince, unlike most other pipeline owners they have their own division that looks after maintaince, they also have contracts to maintain other pipelines that they don't own.

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By the way, how awesome is investing, one moment you are researching the workings of a Hollywood studio, the next learning about how components of the hot section in jet engines are made and then how pipelines are maintained, lol

 

[Value Collector]

Mainly due to the high debt level, the high price and didn't really think a utility could make that much profit or margin or growth. Guess it showed me I ought to make no quick calls.

Scanning their 2015AR and they claim 1300% shareholder return in 15 years? Or 19% p.a. average since IPO?

The debt is a big reason for the high return, pipelines will earn somewhere around 8%-12% return on investment, but if you can fund 70% of the capital outlay with longterm bonds paying a coupon of 5%, then it will boost the return of the equity holders up to the 19% figure they have been earning.

As long as the debt levels are not totally crazy, and the maturity profile is kept long, debt is not a bad thing when it comes to companies with such stable regulate assets as apa has.

Even Buffett who is very risk averse and usually avoids debt holds a lot of debt in his infrastructure businesses eg, Mid American / B & H energy and his rail road, and even Ben Graham talks about how it makes sense for utilities hold a large portion of their capital structure in bonds.

 

[Smurf1976]

I'm conscious that we're getting a bit off the dividends topic of the thread here...

But gas pipeline operator would certainly be running inspection pigs through their pipelines. That's a very standard practice.

If the pipeline has any bridges (to cross rivers, valleys etc) then they'd inspect those too. Normal structural inspection for that and fix any problems found.

Where the pipeline is simply above ground, they would also do some visual inspection of supports and the pipeline itself looking for actual problems or threats (eg trees growing where they shouldn't be).

Gas pipelines also commonly use recompression stations along the pipeline to increase throughput. In short, if you just pump gas in one end then there's only a certain flow that you can achieve by doing that since the pipeline does have some resistance to flow. But if you put a recompression facility along the way, then that's basically a pump to increase the flow rate. Suck the gas in and pump it out again, adding energy to offset the resistance of the pipeline. Quite often a pipeline is initially built without them, then they're added later to increase capacity when required. Typically they are gas-powered (using gas from the pipeline as fuel) but in other cases they use grid electricity (where available) as the power source. Inspection for those would be a normal mechanical and electrical inspection and maintenance at periodic intervals.

They'd also have incidents of suspected or actual damage due to all sorts of things - natural disasters, farming, construction work and so on. In that case they'd send someone out to investigate.

Also would be various remote monitoring systems these days. If an alarm goes off then it requires investigation.

And they would of course also know the volume going in and what's coming out. If gas is going missing then that's a problem to investigate.

That sounds a lot, but overall it's not that much when you consider the value of the asset and the value of what's being transported by it. You don't need a huge number of staff just to keep a watch on things like that.

In the case of APA, they're transporting gas so wouldn't have problems with biofouling (a problem in hydro pipelines and especially canals that requires periodic removal).

 

[luutzu]

I'm conscious that we're getting a bit off the dividends topic of the thread here...

But gas pipeline operator would certainly be running inspection pigs through their pipelines. That's a very standard practice.

If the pipeline has any bridges (to cross rivers, valleys etc) then they'd inspect those too. Normal structural inspection for that and fix any problems found.

Where the pipeline is simply above ground, they would also do some visual inspection of supports and the pipeline itself looking for actual problems or threats (eg trees growing where they shouldn't be).

Gas pipelines also commonly use recompression stations along the pipeline to increase throughput. In short, if you just pump gas in one end then there's only a certain flow that you can achieve by doing that since the pipeline does have some resistance to flow. But if you put a recompression facility along the way, then that's basically a pump to increase the flow rate. Suck the gas in and pump it out again, adding energy to offset the resistance of the pipeline. Quite often a pipeline is initially built without them, then they're added later to increase capacity when required. Typically they are gas-powered (using gas from the pipeline as fuel) but in other cases they use grid electricity (where available) as the power source. Inspection for those would be a normal mechanical and electrical inspection and maintenance at periodic intervals.

They'd also have incidents of suspected or actual damage due to all sorts of things - natural disasters, farming, construction work and so on. In that case they'd send someone out to investigate.

Also would be various remote monitoring systems these days. If an alarm goes off then it requires investigation.

And they would of course also know the volume going in and what's coming out. If gas is going missing then that's a problem to investigate.

That sounds a lot, but overall it's not that much when you consider the value of the asset and the value of what's being transported by it. You don't need a huge number of staff just to keep a watch on things like that.

In the case of APA, they're transporting gas so wouldn't have problems with biofouling (a problem in hydro pipelines and especially canals that requires periodic removal).

But this is how dividends are paid, and if it's worth it or still be around to be paid. So we're on topic

btw, what would happen if a pig get stuck in the pipe?

Interesting... all these time I thought watching documentaries and reading into stuff are just for fun and no money can be made out of it. Maybe shouldn't' speak too soon but awesome.

 

[luutzu]

....

By the way, how awesome is investing, one moment you are researching the workings of a Hollywood studio, the next learning about how components of the hot section in jet engines are made and then how pipelines are maintained, lol

Was that what the visit to Disneyland was? "Researching"? haha

Yes, investing is all that and also one of the few jobs where one could visit exotic places, meet up with a company's PR rep and tell the taxman to foot the bill, couldn't one?

A somewhat devious person, not you or I of course, may even start to buy companies in a few interesting countries with Annual General Meeting coinciding with their featured season.

 

[Value Collector]

Was that what the visit to Disneyland was? "Researching"? haha

Lol, something like that, it depends who's asking