How to invest in SOEs
State asset sales are an emotional hot button, causing much wailing and gnashing of teeth as "the family silver" is prepped for partial privatisation.
But emotions can be disastrous in the cold, calculated and rational world of investment.
With the first of four energy companies planned to float on the stock exchange before the year is out, now is the time to start carefully considering your options.
It's just as hazardous to get caught up in all the hype and political babble floating around.
"The history shows there's a bit of a psychology with investors," says Forsyth Barr boss Neil Paviour-Smith."There's a lot of people who sort of follow the crowd."
Paviour-Smith's company is one of those tasked with informing investors about the sell-downs, but he's not exactly pushy on the sales front.
His focus is getting people to think the decision through very carefully, based on their own circumstances and risk appetite.
With that in mind, we've detailed everything you need to know ahead of the first float, Mighty River Power, and how you can get your own piece of the pie.
"Solid, boring, stable."
Mark Lister's description is about the best thing that can be said for plain-Jane utility companies like Mighty River.
Lister knows a thing or two about electricity, having worked at Trustpower before becoming head of private wealth at Craigs Investment Partners.
Why are utilities relatively predictable? Because even in the depths of recession, people will always need the bare basics, like power.
Electricity doesn't get shipped overseas to be bashed about by currency fluctuations, and it's well-removed from the doom and gloom in foreign markets.
Of course, it does rely on an equally fickle beast to fill the hydro dams - the weather.
There's risk in any investment, but electricity generators and retailers are on the lower end of the scale. And that, says Lister, makes Mighty River attractive to novices and conservative investors.
Besides that, there's the sweeteners for so-called Kiwi "mum and dad" investors. The government appears determined to get people dipping their toes in the sharemarket again, offering:
- Low minimum buy-in of $1,000 worth of shares
- Guaranteed parcel of up to $2,000 worth
- Bonus shares for loyalty, details unknown
The best guess so far is that those who hold onto their shares for three years will get a bonus share for every 10 or 15 they own. Details are still very hazy, so it only gets a tentative tick for now.
"Just like anything else, the negative is that your growth opportunities may be lower," Lister says.
Utility companies are not very glamorous. They're well-established and earn steadily, but are mostly limited to the New Zealand market with not much room for expansion.
Contrast that to an up-and-coming IT firm, for example, which moves rapidly into international markets while yet to turn a profit.
Of the three electricity firms, Mighty River in particular has some modest growth potential, with interests in international geothermal projects.
Nonetheless, its stock is unlikely to skyrocket over the years.
How much faith do you have in the government?
As the controlling shareholder with at least 51 per cent ownership, it will continue to steer the SOEs and have the power to approve or decline any equity-raising activities.
More significantly, it brings with it all the political baggage surrounding the asset sales furore.
It's hard to take Winston Peters' threat to buy back the assets at the original float price seriously, but there's always the uncertainty associated with a political football.
Shares earn money through the payment of company dividends and by selling them if and when the share price increases, or both.
High growth companies often shovel profits back into their own expansion, and might pay no dividend at all.
Lower growth companies, like Mighty River, will typically return a bit more income while not appreciating in value as much.
Over the past five years, Mighty River has paid out 93 per cent of its reported profit to the government.
So what sort of return can investors expect?
"We don't know is the honest answer," says Lister. Specific details will emerge when the official Offer Document is released, but until then he can hazard a guess by looking at similar listed New Zealand businesses.
Utilities such as Trustpower, Contact, Auckland Airport and Vector pay between 5.5 and 7.5 per cent dividends, pointing towards a possible 6-7 per cent yield for Mighty River.
First up: If you're paying off a mortgage, you're probably better off putting your funds toward that, says Nigel Tate, president of the Institute of Financial Advisers.
"It might only be 5 ¾ per cent or something, but it's taxfree and over a period of time it's going to save you hundreds and hundreds of dollars."
If you're debt free, your choice becomes a matter of personal circumstance and investment style.
Some financial advisers think first-timers do well at learning with a small direct investment, while others stick solidly to the mantra of diversification.
As far as investment timeframe goes, high-dividend, low-growth companies are sometimes associated with older investors who need the income.
Low or no dividend, high-growth companies are often deemed suitable for younger investors with more time to ride the ups and downs.
In that sense, the modest-growth Mighty River Power might provide a middle ground.
"Every person is different in terms of their appetite for risk," says Paviour-Smith.
"The best person to decide that is that person themselves, potentially assisted with some financial advice."
But there's a big problem with that, says Tate. It's not going to be economically viable for Authorised Financial Advisers to provide one-off advice to most small investors.
Then there's the fact that only about 1,000 advisers around the country have experience in direct investments, which means the majority of people who do buy into Mighty River will
probably do so without formal advice.
However, Tate does suggest a workaround solution.
"The easiest way for average Joe on the street to get appropriate advice or to get exposure... is probably via their Kiwisaver funds."
Depending on investment style, many Kiwisaver and managed funds will buy up SOE shares as and when they become available.
Tower boss Sam Stubbs reckons institutional investors will end up holding "a very substantial proportion" of the assets in the long run.
That means you get the benefits of diversification and (hopefully) expert management, while still owning a piece of the company.
On the flipside, you miss out on any incentives, and some managed fund fees are quite hefty.
Made it all this way and still interested in making a direct investment?
1. Pre-register your interests
Contact a broker or adviser, or simply sign up to the government website: www.governmentshareoffers.govt.nz/home/
You'll receive email alerts telling you when the offers become available. Don't worry about being locked in - there's no obligation to actually purchase anything at this stage.
2. Weigh it up
If you've pre-registered you'll be sent a copy of the Offer Document when it's released, which will contain all the details that are as yet unknown. Scrutinise it carefully in the context of all the factors above.
3. Make an offer
You can then fill out an application form with the maximum amount of shares you want to buy, or go directly through a broker. If you're trying to get your hands on as many as possible, consider making applications for children and family members.
4. Ask and you shall receive
The government will set the final share price based on the level of demand. If the offer is oversubscribed, you might not get everything you asked for over $2,000, in which case you are refunded the balance.
5. Hold or fold
When you've finally got your promised shares, what do you actually you with them?
If the share price rises after the float, some will try and ditch them for a quick profit, missing out on any loyalty bonus.
Others will hold on for the longterm gains, as the government is no doubt fervently hoping. If you bought shares in children's names, one idea could be to set them aside as self-feeding university funds.
Don't follow the flock without working out what's best for you, and whatever your feelings on asset sales are, leave them at the door.
Any opinions expressed within this article are no substitute for and in no way constitute direct financial advice.
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