Keeping in Contact
04 June, 2015
We wrote about Contact Energy in our March Newsletter under the title "Who's Money Is It" discussing the Directors' decision to invest up to $1 billion of shareholders' money in offshore geothermal operations, rather than pay out those funds as dividends as had been previously indicated by the company (on numerous occasions). Fortunately Contact reconsidered their decision and backed down last month. The company announced that, following a review, they had found "there are no material investment opportunities available at this time that would sufficiently reward shareholders" and decided to pay out $367m by way of a special dividend. Additionally, they committed to thereafter paying ongoing dividends equivalent to 100% of underlying profits. The news was greeted favourably with the share price increasing 11% on the day of the announcement.
There is no doubt that Contact's back-down was influenced by the media and a shareholder backlash, and we are encouraged that the company heeded investors' concerns. We joined other shareholders in engaging with the company and we suspect that Contact's 52% shareholder, Origin Energy, was equally happy with increased dividends rather than an offshore investment programme given Origin's indebtedness and recent credit downgrade. We hope that the Contact Board of Directors learned some lessons from this episode - notably, check in with shareholders before planning large capital investment programmes, given that it is shareholders' capital you will be investing.
Secondly, manage your communications and public relations. If you are going to announce something that will potentially surprise the market (and in these days of continuous disclosure, this shouldn't happen that often) be prepared to provide full and comprehensive answers and explanations. To announce that you are going to invest $1 billion offshore, without giving any indication of likely return on investment or rationale, leaves you vulnerable to criticism especially having had $450m wiped off the company's value on the day of the announcement. The Contact share price has gained ground since the dividend announcement and hopefully the Board will think twice about surprising shareholders in future.