One of my sleepy dividend stocks from yesteryears proposed distributing some of their shares as stock dividends to shareholders.
I want to take a moment to reflect upon this.
Pacific Century Regional Development (PCRD) is the holding company of Li Kar Shing’s son Richard Lee. The holding company’s main assets are stakes in HKT Trust, one of the dominant telecom companies in Hong Kong and PCCW, which owns HKT Trust as well as other services complementary to telecoms.
Almost all the profits of the holding company were derived from the dividends from PCCW and HKT Trust.
Since PCCW and HKT Trust are listed, would owning PCRD be more beneficial than owning PCCW or HKT Trust directly?
Owning PCRD is more beneficial if it trades below its intrinsic value. You own something that owns some other things. If PCCW and HKT Trust are undervalued, we have options to own them directly or own them through PCRD or both.
I present some financial data of PCRD in the following table:
In 2019, PCRD decided to “unlock” the value of the holding company by paying a big dividend (observe the total dividend for the year to be 14.2 cents). The share price before they declared the dividend was around 37 cents, which is not too far from where the stock is trading now.
As a shareholder, you would have received a total dividend of 28.9 cents over the past four years, almost getting back all your capital.
And you would still own this holding company with PCCW and HKT Trust as dividend generators.
PCRD has paid out more dividends to the shareholders than what they received from PCCW and HKT during those years (compare the Total Annual Div Paid Out and Div Received from PCCW & HKT, and you can see there is like $400 mil of difference).
They are financing the dividend by taking on debt (see the increase in debt from 2018 to 2019, which is about $343 mil, almost equivalent to the shortfall).
The dividend of the past few years is likely not sustainable and should be considered a unique unlocking of value situation.
This time, they are going to pay you the majority stake of what they own in HKT Trust (they will be left with very, very little) as a dividend.
After paying you the HKT Trust, PCRD will only get dividend cash flow from their PCCW stake (which PCCW gets from their stake in HKT Trust).
But I think this holding company is not too bad still (for an existing shareholder like myself):
- I have gotten back 80% of the capital through capital gains and dividends over the last two years.
- The HKT Trust stock dividend may mean I got back all the capital (we will calculate that later)
- This will still leave me with a holding company that owns PCCW that will flow S$100 million in dividends a year, which should allow PCRD to continue to pay dividends.
I wonder how much dividend they could pay. This is also a function of whether they are done with the value unlocking. They might go back to not paying dividends! (which they did for a long, long time)
If they pay 2 cents, that is a 4.6% yield based on the current share price of 43 cents, and they would need S$53 million. That is conservative and what they paid out in 2018. If they pay 3 cents, that is a 7% dividend yield, and they would need S$80 million. It would cost them more money, but maybe it is still doable.
My divestment decision would more likely be on whether I can gain a better risk-adjusted return elsewhere and less to do with the dividend payout. As a retiree, it is challenging to estimate Richard Li’s motivation; therefore, PCRD might not be the ideal stock to keep in your dividend portfolio for that.
However, we can use the dividend payout as a valuation metric and determine if the stock reflects its intrinsic value fully.
About the Proposed Dividend in Specie of Share Stapled Units of the HKT Trust and HKT Limited
PCRD will be proposing a distribution of 132 million out of the 145 million HKT Trust and HKT Limited Units they own to the shareholders.
This would help simplify the composition and structure of PCRD’s main investment assets and also reward shareholders at the same time.
This proposal still needs shareholders’ approval, so it is not cast in stone yet.
It looks like part of the money will be used to pay off their debt and payout the rest as dividends. Whether they pay this amount out as dividend or debt, the overall shareholder yield (which is a combination of dividend, share buyback and debt paydown) would be accretive to shareholders.
Based on this, we will get 0.05 HKT share for each PCRD share. Based on the last traded share price of HK$10.90 and exchange rate of $5.71, HKT share will translate to a value of $0.095 per share.
That works out to be a 22.2% stock dividend.
Not too bad. This is why it looks like if the HKT Trust shares get realized, it will be like I get back all my PCRD cost, and I still have the shares to milk some ongoing dividends based on PCCW’s cash flow.
I will consider if I take the dividend as cash or stock much later.
This won’t play out immediately, but it turns out one of my mistakes is still rather profitable.
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