Elementis ELM

[langley59]

I have held this in my HYP since 2013 and have been a happy holder, it rewarded me with a yield on cost of 5.5% in 2017.

Until 29th June this year that is when it announced a large takeover of another company, Mondo Minerals, with a rights issue to boot. I was horrified reading the RNS and sure enough the share price plunged on the news. Suddenly a steady high yielder had become an aggressive acquirer using leverage.

Well today there is another RNS in conjunction with the half year report which states that:

''Following engagement with shareholders in relation to the proposed acquisition of Mondo Minerals B.V., by the Board of Elementis plc (the “Board”) and its advisers, a number of Elementis’ major shareholders have expressed concerns about the transaction. As a result the Board is exploring its options in relation to the transaction and a further announcement will be made in due course.''

The share price was up strongly initially on the news today. Thankfully this seems to be an example of shareholders fighting back against management when it goes too far.

[formoverfunction]

Quite a jump today. I was going to take up my rights, so maybe now I'll be a buyer instead.

I can't see any reasons to rush, so I'm going to hold on and see what develops.

[Gengulphus]

I have held this in my HYP since 2013 and have been a happy holder, it rewarded me with a yield on cost of 5.5% in 2017.

As a bit more information about dividends might be wanted on this HYP Practical board ;-), and also because Chemicals is a sector that is completely missing from my HYP and so might make Elementis an interesting addition to it, I've taken a look at its dividend history. In summarised form, it is:


The sudden abandoning of the special (or "bonus" as they call them in the dividend history) dividends made me wonder what had happened, and I found the answer in this year's final results for 2017:

"Dividend policy

Under the dividend policy introduced in 2012, the Board undertook to pay approximately one third of earnings, after adjusting items, each year in a combination of interim and final dividends. In addition, a special dividend was paid each year of up to 50% of the net cash balance at the end of the year, provided there were no immediate investment plans for that cash.

Following the acquisition of SummitReheis in 2017, and the movement from a net cash to a net debt position, the Board has revised its dividend policy to reflect our view of the long term earnings and cash flow potential of the Group. Going forward:

· It is our intention to pay progressive ordinary dividends, normally with a dividend cover of at least two times adjusted earnings.

· The interim dividend paid each year will normally be one third of the prior full year dividend.

· We look to maintain balance sheet flexibility and strength in the context of the Company's investment plans. Taking that into account, when net debt is structurally below one times earnings (EBITDA) we will seek to make additional returns to shareholders.

This year the Board is recommending a total ordinary dividend of 8.80 cents per share (2016: 8.45 cents per share), reflecting its confidence in the Group's business model and ability to generate cash, the medium term prospects and the levels of investment required over the short to medium term to deliver the Reignite Growth strategy.

· The final dividend will be paid on 1 June 2018 in pounds sterling at an exchange rate of £1.00:$1.4035 (equivalent to a sterling amount of 4.3463 pence per share) to shareholders on the register at 4 May 2018.

· The Board declared an interim dividend at the time of the Interim Results announcement of 2.70 cents per share (2016: 2.70 cents)."

There's no mention of special dividends in that new policy, and my impression from what it says plus its statement that it "has moved from a net cash position of $77.5m at the end of 2016 to a net debt position of $291.1m at the end of 2017" plus the fact that it is clearly considering further acquisitions is that even if it had retained the old dividend policy, the days of regular 'special' dividends would be gone for the foreseeable future. So I would definitely be thinking in terms of a historical yield of 6.40p/265p = 2.44% at the moment. Or using the WebFG / DigitalLook forecast of 6.86p, a forecast yield of 6.86p/265p = 2.59%.

Those are definitely well below this board's requirement for a yield of at least the FTSE 100 average yield for a HYP purchase, so that rules Elementis out as a candidate for my own HYP. And because shares acquired in rights issues are effectively bought at close to market price once one takes both the value of the right used and the subscription price into account, the same goes for acquisitions in rights issues IMHO.

For the avoidance of doubt, note I'm not saying Elementis is unsuitable for discussion on this board: as far as I'm concerned, the fact that you've bought it for your HYP in the past, at a time that it plausibly did qualify for a HYP purchase, and still have it makes the company suitable for discussion here. But any share acquisition at (or effectively at) market price now simply isn't a HYP acquisition, at least in my view.

I assume that your yield on cost of 5.5% in 2017 includes specials and is based not on dividends paid for 2017, but on dividends paid during 2017, i.e. the company's final of 4.60p for 2016, its special of 6.68p for 2016 and its interim of 2.05p for 2017. That's because it's the only way I can see to get a figure in the region of 5.5% on its cost in 2013, given that a price chart shows that the share price is little different now from what it was in 2013. But if you include specials in your yield calculations, I think you should also include them when looking at what the company has done with its dividends, and so should consider it to have become quite a severe cutter when it announced its 2017 results earlier this year. And that points out a danger of including regular specials (which I tend to think of as 'not-so-specials') when determining yields: by calling them specials, the company has warned you that it's more likely than normal to cut them...

Finally, the long quote above from the 2017 results does also point out that the two small reductions in the ordinary dividend total are almost certainly due to exchange rate effects and the company declaring its dividends in dollars, not to the company cutting its declared ordinary dividends.

Gengulphus

[Itsallaguess]

So I would definitely be thinking in terms of a historical yield of 6.40p/265p = 2.44% at the moment. Or using the WebFG / DigitalLook forecast of 6.86p, a forecast yield of 6.86p/265p = 2.59%.

Which again highlights two very important potential issues for HYP owners -

1. Never get fixated with any 'yield on cost' figures. They are almost always irrelevant in terms of how we might be sweating our invested HYP capital today. Often used as a comfort-blanket, and nothing more, and a dangerous one at that if they are used exclusively, whilst not keeping an eye on the hugely more important 'current yield' figures....

2. Don't get too used to special-dividends. They're called 'special' for a reason....

Cheers,

Itsallaguess

[langley59]

I assume that your yield on cost of 5.5% in 2017 includes specials and is based not on dividends paid for 2017, but on dividends paid during 2017, i.e. the company's final of 4.60p for 2016, its special of 6.68p for 2016 and its interim of 2.05p for 2017. That's because it's the only way I can see to get a figure in the region of 5.5% on its cost in 2013, given that a price chart shows that the share price is little different now from what it was in 2013.
Gengulphus

That's correct.

[langley59]

Just to conclude on this, they are going ahead with the proposed acquisition and rights issue subject to shareholder approval. I have just voted against.