Stumbling Spark’s string of missteps

It’s been a good year for the local sharemarket.

The NZX 50 index is up 11.0 per cent so far, which sees it on track for its best year in four.

Most of our biggest companies have performed well, but one notable exception is Spark.

It’s share price is down more than 40 per cent in 2024, making it one of the biggest decliners across the entire exchange.

There are several reasons for the disappointing performance.

Some of these are a function of the economic backdrop, while others are of the company’s own making.

New Zealand has been in recession for two years on a per capita basis (which is what matters for most of us).

Against that backdrop, investors had expected a company like Spark to be a solid performer.

It was seen as a stable, consistent business with a reliable dividend and limited sensitivity to the state of the economy.

We call that sort of stock a defensive one.

Many of us got that wrong, with Spark running into more headwinds than expected.

The company obviously underestimated the challenges it was facing too.

It reduced its earnings guidance back in May, but missed the bottom of this estimated range when the result was reported in August.

While only a minor shortfall, investors don’t like to see relatively predictable businesses missing guidance, especially just a few months after providing it.

Since then, Spark has cut its 2025 dividend guidance further, although some analysts believe it mightn’t have gone far enough.

Another challenge facing the business is the fact it has too much debt.

In 2022, Spark sold 70 per cent of mobile tower business for $900 million to a Canadian investment fund, the Ontario Teachers’ Pension Plan.

It elected to return a good chunk of it to shareholders by way of an on-market share buyback, which began early last year.

In hindsight, the conservative option would’ve been to hang onto this capital.

With the share price languishing at a near decade low of under $3.00, the Board looks a little unwise for buying back a whole heap of shares above $5.00.

This has put the balance sheet under pressure, with debt now above its own targets.

The company intends to sell its remaining stake in the tower business, and it’ll need to explore other options to fund its growth ambitions.

All this culminated in Spark being removed from a key global index last month, which led to an additional wave of selling from funds that follow this benchmark.

Unsurprisingly, the board and leadership team haven’t endeared themselves to the investment community over this period.

The lack of engagement from the senior management team has also been disappointing.

Challenges and rough patches are a part of being in business, but companies need to take responsibility and make sure they’re accountable.

For listed companies, front-footing it with your shareholders is also crucial.

Spark isn’t one of our biggest holdings, but our clients still collectively own 3-4 per cent of the company.

From our perspective, Spark didn’t follow those simple rules very well.

They didn’t treat their shareholders capital with the respect it deserves, and they didn’t front up.

While the share price might not return to its former glory anytime soon, that doesn’t mean it doesn’t look reasonable value right now.

Despite getting belted all year, the stock is still paying an annual dividend of 25c, with partial imputation tax credits on top of that.

At $3.00 a share, that’s a gross dividend yield easily in double digits, and even if we see further slippage many investors would argue all the bad news (and more) is in the price.

However, it’s a long road back to $5.00 and the company has a mountain to climb if it wants to earn back its credibility with existing shareholders.

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