What do you like about the business?
Spark Infrastructure owns regulated electricity transmission and distribution assets. We like Spark Infrastructure because of the company’s ability to pay sustainable dividends and, importantly, it offers good value.
The company owns monopoly assets, which offer low risk and stable cash flows.
How can you determine whether this stock has the ability to pay sustainable dividends?
We look at three factors when identifying whether a company can sustain its dividends. This includes the level of recurring earnings, balance sheet strength and the payout ratio.
Spark Infrastructure owns monopoly assets and as highlighted earlier, recurring earnings from these assets are high.
The company’s balance sheet is not highly leveraged and the business has been deleveraging steadily over the last five years. In terms of its payout ratio – the company has sensibly paid out a conservative percentage of its earnings in dividends – around 50%. This allows the company to reinvest in the business, ensuring future growth in the business.
What do like about its management?
We really like the management behind the business, particularly their ability in operating the assets and their attitude in regards to capital allocation. They have been prudent with using the cash generated in the business to fund their large capex program. This conservatism has ensured that the company can deliver sustainable shareholder returns.
How long have you held the business?
We initiated a stake in the business 12 months ago. We were attracted to the business because the company was good value and was approaching the end of their de-leveraging period. This meant that the business was in a position to significantly raise their dividends in the future.
At what point would you sell it?
Based on current share prices, the company is good value as it is trading around 10x free cash flow multiple.
We would probably look at exiting the stock when there is less value, which would most likely be around $2.60.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
In context of the market that has fallen more than 10% over the last year, Spark’s defensive qualities have avoided the market carnage.
The share price has been flat at around $2 a share but has delivered a 6% dividend yield over the last 12 months.
Spark Infrastructure
Source: Yahoo!7 Finance
Jason Teh is a senior portfolio manager with Investors Mutual.
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