Dividends.

The entries so far in my guessing competition (thanks for the entries and comments so far) has started me thinking about the upcoming dividend.


We know that Cellestis had around $20m in cash as at 31st December 2009. The CEO of Cellestis has previously indicated that something around $20m is an adequate cash holding for the company.


Why do companies hold back some of their cash profits into a cash reserve?

• as a buffer against temporary future misfortunes
• to cover the cycle of operating cash requirements (inventory, salaries etc)
• to reinvest cash back into the business (purchase/build physical assets, R&D etc etc)
• to build a war chest for potential corporate action (takeovers)

Let's look at these reasons as they relate to Cellestis.

It is fairly unlikely that there is any severe future misfortune that a cash reserve could solve. Let's think of the worst possible misfortune. How about if somebody released a competing diagnostic that is better, cheaper and faster? (it's not going to happen). In reality, no practical amount of cash on hand would save Cellestis in that situation.

It seems that the $20m cash on hand is more than adequate to cover the cycle of operating cash requirements - even if massively increased sales demand an increase in inventory purchases. A modest increase in cash over time, in proportion to sales growth, to maintain this cover may well be justified.

Cellestis' R&D is a relatively low cost item that can easily be financed from ongoing cash flows. It is unlikely that Cellestis is about to build a factory, buy a chrome and glass edifice to somebody's ego or anything similar. The management have demonstrated a commitment to modest and sensible use of capital - there is no reason to expect that this will not continue.

Takeover. There is nothing that we know of on the horizon. It is simply not sensible to hold back large amounts of cash profits on the "off-chance" that a suitable takeover may appear. Cellestis does not really need to get involved in a takeover at this point. Maybe at some future time it will become a useful action - at that time a takeover can be financed by the cashflow at that time and debt. There is no need to husband cash for that eventuality.

We could expand on all of those points quite extensively. However, the basic point is clearly evident - Cellestis would need a justification for increasing its cash holdings. Now, there may be some great justifications. If there are, then we would expect and be entitled to have those justifications explained to us in the upcoming accounts.

Looking at it the other way round - I can see no reason why the Company would NOT increase it's dividend payout ratio significantly from the current 45%.

Now, I don't know what the NPAT figure for 2010 FY will be. Just for this exercise, let's guess that it is $10m. Given that we have already received 1.5c dividend this year then I can see no reason why the dividend for the second half should not be 5c or 6c - giving a dividend payout ratio of 65% or 75% (annualised) or 71% to 85% (on a current half basis).

We can look at this from another angle. In general, the Cellestis share registry is predominately populated with investors, rather than traders. In a pure sense, investors achieve a return on their investment through the receipt of their fair share of the profits that are made by their company - not by selling their shares. The investors in Cellestis have been wise (or lucky) - we have invested in a startup biotech that has succeeded in reaching profitability. It is only reasonable that we, the investors, should now start receiving a return on our investment (without selling the investment that we have made).

Anybody else have thoughts on this?