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Woodside comes out of its Shell

Jan du Plessis and Jac Nasser, respectively chair of RIO and BHP, both smelling the coffee this morning, will have realised Woodside’s stunning announcement of a whopping special 63 cents franked dividend and increased payout ratio of 80%, has changed the game forever for capital intensive, low yielding resource stocks.

At Kimber Capital, and on Sky’s Your Money Your call (Wed 8pm AEST) we campaigned long and loud for resource companies to step up their widows and orphans dividend policy.  BHP responded to criticism saying its dividend growth has surpassed that of CBA in the past ten years. Nevertheless BHP’s payout ratio is still a paltry 48%, compared with the 60 and 70% of the banks. Both companies are guilty of expansion for expansion’s sake, pillaging shareholder’s funds in the process and reloading balance sheets with debt.

Woodside’s historical payout and the current special which goes ex April 30th (need to buy before that date) puts WPL on a gross yield of over 8.6% –  which rivals that of CBA. Our ‘tight five’ of the banks and Telstra has now been expanded to the ‘stupendous six’ to include WPL. In subsequent years the gross yield will average approximately 8.0%.

Looking at forward earnings estimates over the next 2-3 years, WPL could easily pay an ongoing 8% gross dividend yield. Shareholders definitely see better value in cash distributions for their super funds rather than capital measures like buy backs. Investment 101, BHP and RIO – take note.

On a comparative basis, BHP and RIO trade on gross yields of 5.2% and 4.8%. Telstra is 8.3% and a payout ratio of nearly 95%. The bank average gross yield is now 7.6%.

How can Woodside sustain a high payout ratio? By deferring and perhaps eventually cancelling expansion of the Browse Basin and Pluto 2. Woodside will distribute in excess of $2.1 billion over the next three years as cash flow rolls in. Management and the WPL board is to be applauded for taking such a pragmatic approach, rather than sitting on a cash hoard. With global interest rates tracking at near zero for the foreseeable future, WPL would have no trouble in raising debt to take advantage of any drop dead corporate opportunities which fell into its lap.

The next big thing for WPL will be Royal Dutch Shell’s 23% shareholding in the company. The cloggies will no doubt be looking for an opportunity to exit the stock post the special dividend and a share price with a 4 in the front. This event will be something like the Future Fund selling Telstra – at a record low for the share price.

Woodside is presently a buy, and short term this parcel may hang over the price’s progress. Once it clears, watch the price spike. Meanwhile Jac and Jan will be grappling with recalcitrant boards and trying to quell the growing shareholders chorus of “please sir we want some more.”

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