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Mighty Dividend Power

Mighty River Power (ASX:MYT) is one of New Zealand’s largest electricity producers, using renewable energy to power nearly one in five of that country’s businesses. The company has recently emerged from under a cloud of regulatory threats and is one of Australasia’s strongest dividend payers with a trailing yield of over 5%. Mighty River Power’s low-cost generation assets should provide a steady stream of growing dividends for years to come.

Fighting in public

Mighty River Power was first publicly listed in May 2013 through the New Zealand government’s partial privatisation scheme.

This asset sale program was controversial and two opposition parties tried to stymie the listing. On the eve of the IPO these parties publicly announced that they intended to create a national power purchasing board that would effectively set electricity prices in New Zealand.

This threat of heavy-handed government regulation put a cloud over Mighty River Power, with concerns that the company would not be allowed to earn a fair economic return on its assets.

But, after the National-led government’s resounding victory in the recent New Zealand elections, this threat has now dissipated, leaving Mighty River Power free to focus on boosting shareholder returns.

Renewable dividends

Our first question when we consider investing in a company for its dividend yield should be: is the current yield sustainable?

Mighty River Power generates over 95% of its electricity from renewable energy sources, namely hydro and geothermal. These assets have incredibly long (bordering on infinite) useful lives, with relatively low annual maintenance expenditure required.

The company’s crown jewels – its hydro-electric dams – are a unique asset. Built in the middle of the 20th Century by the New Zealand government, these dams are located on the Waikato River system. This location, close to New Zealand’s major population centres of Auckland and the Central North Island, save the company from significant transmission losses.

Those transmission savings combined with the low cost of hydro-electric generation give Mighty River Power a significant cost advantage. Even during times of lower consumption, the demand for the company’s base load electricity generation remains strong.

Mighty River has also kept its balance sheet healthy, with a debt to equity ratio of only 35% and its profits easily cover repayments.

With the immediate threat of government intervention now gone, there is every reason to expect the dividend payout will be maintained.

Powering the future

The next question is, will the company be able to increase its dividend in the future? Once again, Mighty River Power is looking good.

In Mighty River’s prospectus the company outlined plans for international expansion with geothermal developments in South America and the United States. However, after further evaluation the company appears to be choosing to instead return its focus to New Zealand. With no clear competitive advantage in international markets, that’s  a smart move.

It will also free up the capital expenditure that had been planned for the international expansion to be paid out as dividends. This leaves Mighty River Power as the rare prospect of providing both a high current dividend yield of 5.3% and strong prospects for future dividend growth.

What’s the catch?

For Australian investors there are two things that need to be considered when investing in Mighty River Power.

The first is that because the Mighty River’s income is earned in New Zealand, Australian investors won’t earn Australian franking credits. Still, with a current yield of over 5%, income-focused investors with a low marginal tax rate may find this one hard to pass up.

The second is that it exposes Australian investors to the New Zealand dollar, with all the risks and benefits that this entails. A falling New Zealand dollar would be bad news in the short term, but over the long run any currency changes are unlikely to be the most main driver of returns.

Foolish takeaway

Mighty River Power’s strong market position and durable assets make it tough to pass up. Although Australian investors miss out on franking credits, a high current yield and the prospect of future dividend increases mean Mighty River Power should not be overlooked.

If you love dividends simply click here to claim your free copy of this brand-new investing report, "The Motley Fool's Top Dividend Stock for 2014-2015."

 

Matt Joass is the Research Analyst at Motley Fool Pro. You can follow him on Twitter @TMFMattJoassThe Motley Fool's purpose is to educate, amuse and enrich investors. Matt and The Motley Fool do not own shares of any companies mentioned in this article. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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