I was at the MIIF presentation yesterday to get further insights of how the Macquarie International Infrastructure Fund (MIIF) was performing. Gavin Kerr, managing director of MIIF’s manager, gave a review of the 3rd quarter’s performance as well as answered questions from the audience.

While the share price has dropped more than 50% in the last two months, we were told the business of the underlying assets were still pretty much sound. The drop in share price was due to hedge funds selling and extremely bad market sentiment.

This is one of the pitfalls of being a listed fund – having a valuation that is affected by daily market sentiments. If MIIF had been unstructured as an unlisted fund, the investors would be sitting pretty comfortably collecting their regular dividends, with not much change in the NAV of the fund.

But as MIIF is listed, we do get daily quotes of the price. It would take a heart of steel for a shareholder to be unaffected by a 70% drop in the “mark-to-market” value of his investments.

Actually, if I were a long term investor of MIIF (this applies to any stock) AND the business fundamentals are still good, I wouldn’t be too affected by the extremely depressed price. Why?

• As a long term investor with holding power, I have no intention of selling so the low price is irrelevant to me. Unlike listed companies, I do not need to report to shareholders every quarter and face the music for a big impairment to the balance sheet. A low price is only negative for me if I need to sell.
• On the contrary, I can make use of the low price to accumulate more of MIIF if I want to. 
• The management fee charged by Macquaire is based on the average share price. A low price means the fund will be paying less in fees. This is a reduction in expense and is good for shareholders. Having said that, I feel that a fee structure based on share price is far from ideal.

 
You can download the presentation slides as well as listen to the recording of the session below:

MIIF 3rd Quarter Presentation Slides

Click here to leave a comment.

This post is a continuation of my earlier discussion on the Macquaire International Infrastructure Fund scrip dividend scheme. If you haven’t read it yet, it would be better for you to do so before reading on.

Even though the title of this post is about MIIF dividend reinvestment, what is discussed will be generally applicable to other companies that offer scrip dividend as well.

The same example will be used but we’ll also be looking at a few cases where the share price is not trading close to the NTA.

First, a recap of the default scenario.

Stock A has 10,000 shares in circulation and the net tangible assets of the company is $10,000. The market price of each share is $1. Thus, the share is trading at NTA price.

$1 of asset can produce $0.05 in earnings so initially, the $10,000 that the company has produces $500 in profits.

The issue price of the scrip dividend is $1 per share.

You own 1000 shares of the company. Earnings attributable to you is $50.

We will only consider the case where you are the only one taking up the scrip dividend and the company is able to reinvest the excess cash to produce the same rate of return.

Total shares in issue is now 10050 shares and you own 1050 shares of the company. Company assets have gone up to $10050.

For the next period, earnings per share is $0.05 and your share of the earnings will be $52.50. It has compounded at 5%.

Now, let us consider 2 more cases:

1. Share price trading at 50% discount to NTA
2. Share price trading at 200% of NTA

Share price trading at $0.50, NTA is $1/share

The issue price of the scrip dividend is $0.50 per share.

After you receive the scrip, the number of total shares will be 10100 and you will have 1100 shares.

NTA/share = 10050/10100=$0.9950

Your share of the assets = $0.9950 x 1100 = $1094.55

Earnings per share (for the next period) = 502.50/10100 = $0.049752/share

Your share of the earnings = 0.049752 x 1100 = $54.73 (9.46% increase)

Even though earnings per share for the company has dropped, your own earnings has increased more (9.46%) than that achieved by the company (5%) using your additional funds.

Those who didn’t opt for the scrip will see a decrease in their total earnings as their number of shares has not changed.

Share price trading at $2, NTA is $1/share

The issue price of the scrip dividend is $2 per share.

After you receive the scrip, the number of total shares will be 10025 and you will have 1025 shares.

NTA/share = 10050/10025=$1.00249

Your share of the assets = $1.00249 x 1025 = $1027.56

Earnings per share (for the next period) = 502.50/10025 = $0.05012/share

Your share of the earnings = 0.05012 x 1025 = $51.38 (2.8% increase)

The result is the opposite of the previous case.

Even though earnings per share for the company has increased, your own earnings has increased less (2.8%) than that achieved by the company (5%) using your additional funds.

Those who didn’t opt for the scrip will see an increase in their total earnings even though their number of shares has not changed.

From the above calculations, the conclusion I draw is that if the share price is trading at a discount to NTA, it is good to take scrip. If it is trading at a premium, taking cash would be better.

Of course, that’s taking a simple approach as I’m assuming the company can reinvest my capital at the same rate of growth of 5%. Repeating the calculations for different growth rates might be tedious and impractical. One way of doing that is to use an Excel sheet.

Macquarie International Infrastructure Fund (MIIF) had previously announced that they have a scrip dividend scheme as an alternative method for investors to receive their dividends.

What this means is that an investor can opt to receive shares instead of cash as dividends. The amount of shares you receive will be based on your entitled dividend amount divided by the issue price.

The issue price is fixed at a 5% discount to the mean of the closing price from 14th March 08 to 4th April 08.

You can decide whether or not to opt for the scheme after the issue price has been fixed and you can also choose whether this decision is a one time thing or applies to all future dividends as well.

What are the pros and cons of this scrip dividend scheme? Let’s list out some of common thinking before you decide whether to opt for it. Note that what is discussed will be applicable not just to Macquaire International Infrastructure Fund, but other companies as well.

• It allows an existing investor to reinvest into the company without paying commissions and at a discount to the market price.
• You end up with odd lots.
• There is share dilution and earnings per share will drop.

Now, let us go into a more detailed analysis to establish whether the above makes sense. For simplicity sake, the terms earnings and dividends will be used interchangeably (assume 100% of earnings is declared as dividends).

Consider this:

Stock A has 10,000 shares in circulation and the net tangible assets of the company is $10,000. The market price of each share is $1. Thus, the share is trading at NTA price.

The company makes $500 in profits. This income is generated by the $10,000 worth of assets or restated, $1 of asset can produce $0.05 in earnings.

The issue price of the scrip dividend is $1 per share.

You own 1000 shares of the company. Earnings attributable to you is $50.

Scenario 1 – Everyone takes up the scrip dividend

Total shares in issue is now 10500 shares and you own 1050 shares of the company. Company assets have gone up to $10500.

What happens during the next period?

Case A – $500 is not put to use therefore earnings remain the same.

Earnings per share (for the next period) = 500/10500 = $0.0476/share

Your share of the earnings = 0.0476 x 1050 = $50

NTA of the company = 10500/10500 = $1

What has happened? You have sacrificed $50 cash dividend and when the next period comes, the dividends you receive is still the same even though the number of shares you own has increased.

Actually, you have not really lost the $50 you didn’t pocket as it is reflected in the total NTA in the shares you hold ($1x 1050).

Case B – Company uses the $500 to purchase an asset which can produce an income of 5%.

New earnings = 10500 x 0.05 = $525

Earnings per share (for the next period) = 525/10500 = $0.05/share

Your share of the earnings = 0.05 x 1050 = $52.50

NTA of the company = 10500/10500 = $1

Your share of the earnings has gone up. Nice! As the same for 1A, your share of the assets is 1 x 1050.

Scenario 2 – Only you take up the scrip dividend

Total shares in issue is now 10050 shares and you own 1050 shares of the company. Company assets have gone up to $10050. What happens during the next period?

Case A – $50 is not put to use therefore earnings remain the same.

Earnings per share (for the next period) = 500/10050 = $0.04975/share

Your share of the earnings = 0.04975 x 1050 = $52.24

NTA of the company = 10050/10050 = $1

This time round, your dividends have gone up even though earnings for the entire company has remained the same. This happens because you now own a greater percentage in the company.

Someone else who had not taken scrip would actually receive less dividends.

Case B – Company uses the $50 to purchase an asset which can produce an income of 5%.

New earnings = 10050 x 0.05 = $502.50

Earnings per share (for the next period) = 502.50/10050 = $0.05/share

Your share of the earnings = 0.05 x 1050 = $52.50

NTA of the company = 10050/10050 = $1

Earnings/share has gone up. Notice your share of the earnings is the same amount as 1B.

Someone else who had not taken scrip would receive the same dividends as before.

Let’s sum this all up.

Scenario 1A is the worst case to take a scrip dividend.

In scenario 2A, your earnings compound by 4.5% due to the actions of other shareholders even though company does nothing with your new capital.

In scenario 1B and 2B, your earnings compound at 5%. This is the result of the company putting your capital to good use.

Of course, there are cases where the manager uses the excess capital to generate earnings from 0-10%. You can try repeating the calculations here.

The conclusion I draw is this: If the manager can’t put our capital to good use, we would be better off taking the cash dividend and reinvesting it somewhere else. If we believe in him and are satisfied with the earnings he can achieve with our capital, the scrip dividend is worth considering.

What about the issue of odd lots? If you investment horizon is long, it shouldn’t really matter as your number of shares should compound sufficiently to allow them to sell them (if you want to do so). You can treat the few odd lots left behind as dividend play.

But I’m not done yet. Because in the examples I have given, the market price is equal to the NTA of the share. What happens if they are different? That is another important factor to determine whether or not I will take a scrip dividend. This will be explored in another article.