Question 1: Why do some companies offer dividend re-investment plans (DRPs), and others don’t? Why have the discounts shrunk? – with CBA and others, there is no discount.
Answer: Institutional investors don’t like dividend re-investment plans. Raising capital on “auto-pilot” may not be in the company’s best interest. Also, they can be dilutive – and if at a material discount, even more dilutive.
So DRPs are viewed as being for retail investors. Consequently, they are only offered by companies with a big retail shareholder base. The trend has been to minimize or eliminate the discount. Some companies, such as CBA, even go to the effort of “neutralizing” their DRP. That is, for every new share issued under the DRP, they buy it back on the ASX.
Question 2: Is Pilbara Minerals (PLS) still a buy?
Answer: Lithium producer Pilbara Minerals (PLS) was certainly a “buy” back on 17 June when it traded at $2.02. Today, it closed at $3.47.
On Wednesday, it reported EBITDA of about $850 million and NPAT of over $500 million. An amazing performance compared to FY21 – shows you the potential profitability of mining lithium. PLS was also pretty positive on their production for FY23.
There is so much hype about lithium and electric vehicles. For investors, it is about where we are in the “hype curve” – but if lithium (and the concentrates) follow the path of every other commodity, higher prices mean that supply will meet demand. It always does.
Pilbara is my preferred lithium stock. The brokers are mixed with a consensus target price of $3.75. Macquarie loves it and raised its target price from $4.00 to $5.40, while Credit Suisse went the other way and downgraded to an underperform and target of $2.30. JP Morgan also downgraded to ‘hold’, target price of $3.50.
I reckon a stock to buy in a pull-back. Interestingly, one of the brokers is alluding to the payment of dividends later this year and PLS attracting “yield” investors.
Question 3: I was looking at the Buy/Sell/Hold article in Monday’s Report. I see that a number of companies that reported well were downgraded, while several companies that reported poorly were upgraded. Can you please explain?
Answer: Broker analysts calculate a target price for each company. While they use several methods, most employ in some form a discounted cash flow analysis. The key input to this calculation is forecast earnings and the so-called “terminal value”.
Their rating (buy, sell or hold) is largely determined by comparing the current ASX price to their target price. If (for example) the target price is materially higher than the ASX price, they may place a “buy” recommendation on the stock.
After a company reports, they review their model and may adjust their earnings forecasts and target price. But if the ASX price moves, and there hasn’t been much change to their target price, what was previously a “buy” might now be a “hold”.
So we get lots of downgrades/upgrades following company results because the ASX price moves more violently than the change in broker target prices.
Question 4: Is EML Payments (EML) a buy?
Answer: Gutsy. Just when you think things can’t get any worse, they come out with another bad news announcement (this time a fraud, maximum exposure about $8 million). While this is not a disaster (and is relatively small in the scheme of things), management is not yet in control. Avoid – for punters only.
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