Z signals bigger dividends, affirms earnings guidance

Z Energy anticipates paying bigger dividends to shareholders under a new policy.

Z Energy anticipates paying bigger dividends to shareholders under a new policy, which will see it slow down an accelerated pace of debt repayments at the end of the financial year and fund new capital purchases by selling other assets.

The Wellington-based company had been targeting 10 per cent annual growth in dividends per share as it repaid $705 million of bank debt taken on to fund the acquisition of the Chevron New Zealand assets, tweaking an earlier policy of paying dividends of 80 per cent of replacement cost net profit. In a briefing to investors in Auckland, Z today said it will pay between 80 per cent and 100 per cent of free cash flow in the 2019-to-2021 financial years. On the mid-range of potential outcomes, that would see dividends of 40-to-42 cents per share at 80 per cent of free cash flow and up to 55-to-55 cents at 100 per cent.

"The rationale for this policy is simply 'better with you than us'," chief executive Mike Bennetts said in a statement. "This policy rewards investors for their support and sees Z as one of the leading yield stocks across the NZX without the complexity and unpredictability of share buy backs or special dividends."

Z's projected 32 cents per share dividend payment for the 2018 financial year represents a dividend yield of 4.2 per cent at the current share price of $7.62, and would rise to as much as 8 per cent under the new dividend policy, it said.

The company signalled it was reviewing the dividend policy at the start of the year after debt repayments were tracking three or four quarters ahead of schedule.

Z today said it will reduce net debt to replacement cost earnings to a ratio of 2 times at the end of the current financial year, a year earlier than anticipated. Once that's achieved, it will look to lower that ratio to 1.5 times by the end of the 2021 year, which Bennetts said offers "future optionality and further de-risks the company" and was a result of consulting with shareholders on the distribution policy.

The company also changed its capital policy, where it will pay for new service stations or supply chain assets from the proceeds of selling less productive assets. It's spending $90 million of capital expenditure on maintaining the network and buying growth assets, and under the new policy anticipates annual integrity capex of $40m.

Z affirmed guidance for annual replacement cost operating earnings before interest, tax, depreciation, amortisation, and financial adjustments of between $445m and $475m, up from $419m in 2016.

Bennetts said the outage of the pipeline between Auckland and the Marsden Point refinery was still unclear but hasn't affected the company's earnings forecast.

Z also outlined plans to eke out more efficiency in the business as it beds in the acquisition of the Caltex service station chain, and has identified an extra $30m-to-$35m of annual savings it can make by 2020 on top of the $40m-to-$45m already flagged.

Bennetts said the company is preparing a longer-term strategy and is focusing on low-to-zero carbon fuels such as bio jet fuel, a technology-driven shift in mobility such as autonomous vehicle sharing, and using its retail network to deliver goods and services such as 3D printing and drone delivery. Z has already invested $250,000 into the MEVO electric vehicle ride-sharing firm, which wants to introduce 50 electric hybrid Audi vehicles in Wellington over the next six months, which customers can book and access via a mobile app.

"We're acutely aware that to engage strategically around how Z might participate in a range of future scenarios requires new capability inside the company," Bennetts said. "We have a small team both to drive innovation through the core business and to carefully and methodically analyse options in the three market spaces."