In the last post, we talked about enterprise value and how you could use it to avoid making potentially loss making investments in dividend plays which were unsustainable.
Q3 hedge fund letters, conference, scoops etc
You can check it out here:
What is enterprise value and how can it help you avoid losing money? [Case Study: Asian Pay TV]
Another company which debuted to great fanfare but has languished over the last few years has been Hutchinson Port Trust.
Digging deeper
A typical characteristic of companies with high debt load are that they are extremely capital intensive in nature and require continual investment. This makes the dividend vulnerable in the case of
- Industry downturn
- Increase in CAPEX expenditures
- Increase in interest rates
- If management decides to pay down existing debt
CAPEX expenditures (also known as capital expenditures or purchases of property, plant and equipment (PPE)) is money used by the business to acquire, upgrade, and maintain physical assets such as property, or equipment.
A look at Hutchinson Port Trust
I have looked at HPH Trust multiple times over the years as its share price continued to trend downwards but have always passed ultimately.
First off, looking at its enterprise value, it is clear that it is highly leveraged.
More importantly, when I look at the cash flow analysis – the dividend to shareholders has always looked suspect to me considering that it was not able to generate enough cash to support its regular dividend to shareholders.
Combining it with the fact that interest rates were already at all time lows and would trend up at some point in the future (thereby increasing interest costs) did not help either.
Ending thoughts:
Combining the use of enterprise value with cash flow analysis can help assess the sustainability of dividend plays and avoid huge capital losses when dividends are cut!
Article by Jun Hao, The Asia Report
