Trying to wave down a stampede of elephants can be a thankless and possibly dangerous task, but someone's got to try to do it.
Right now, potential investors in Mighty River Power sound like the thundering herd. They can smell the water in the muddy oasis on the other side of the hill and nothing's going to stop them.
Demand for the shares in the state-owned power generator and retailer has appeared overwhelming in recent weeks. The speed and the number of pre-registrations blew expectations out of the water. Demand was so heavy and fast it took down the registration website on the first day.
Institutional investors seem to be drooling just as much. New Zealand stocks generally have risen almost 30 per cent in the past year. The two most comparable stocks to Mighty River, Trustpower and Contact Energy, have risen 21 per cent and 16 per cent respectively.
This salivation is all about dividend yield. Bank and government bond interest rates around most of the world are in the 0-2 per cent range and even in New Zealand, where term deposit rates are around 4 per cent, there is huge investor demand for shares in solid companies with dividend yields in the mid to high single digits.
Also, trillions of dollars of money is being printed this year by central banks in the Northern Hemisphere to buy Government bonds. Investors are looking to invest that cash in other countries that generate real returns from economic growth and aren't printing money. New Zealand is a prime candidate for investing this freshly minted money in solid dividend yielding assets.
Mighty River's yield from its solid market position is its main attraction. It will remain 51 per cent owned by the Government and produces 17 per cent of New Zealand's power. It has the dominant electricity retailer in the country's biggest residential market, Mercury Energy in Auckland, and produces 90 per cent of its power from renewable means, including 30 per cent from geothermal power, which isn't dependent on rain or wind.
It supplies nearly 1 in 5 New Zealand households and has 390,000 customers who have to buy its product every hour of the day.
Mighty River Power is forecasting a gross dividend yield of up to 7.7 per cent, including imputation credits, which mean investors don't have to pay tax on the dividends. The cash dividend yield is forecast at up to 5.5 per cent. It seems the surest of sure things. "What could possibly go wrong?"
Quite a lot, it turns out, if you read the 257-page offer document, as all potential investors should.
Firstly, Mighty River Power has a fair amount of debt and is forecasting to increase it by $250 million to $1.126 billion in the two years to mid next year as it ramps up its geothermal investments. This higher debt and a rise in interest costs helps explain why its underlying earnings are expected to fall 13 per cent next year.
Yet Mighty River Power isn't keeping anything in reserve. It is forecasting paying out 107 per cent of its profits in dividends this year. In effect, it is borrowing a bit to pay next year's dividend.
There are risks aplenty in the offer document's outlook too. The expected closure of Tiwai Pt smelter "could lead to a sustained reduction in electricity prices in general".
Mighty River is also relatively expensive, forecasting a price to earnings multiple of up to 24.4.
There's a few red flags to distract the thundering herd. It may still thunder on and drink happily from the oasis, but at least it has been warned. I'm still undecided on whether to buy.