Our company's policy is to distribute to shareholders all funds surplus to the investment and operating requirements of the company as determined by the board with a target dividend payout ratio in respect of each financial year of 60% of free cash flows but subject always to:
The solvency requirements of the Companies Act;
Any banking or other funding covenants by which the company is bound from time to time;
The investment and operating requirements referred to in this clause; and
Maintaining an investment grade credit rating from Standard & Poors or another credit rating agency of similar standing.
The target dividend payout ratio set out in this clause is not to be changed in any manner which results in a lower level of payments to the company's shareholders without the prior written agreement of the Entrust (formerly the Auckland Energy Consumer Trust), for such time as Entrust is a majority shareholder.
In measuring the company's performance against the target dividend payout ratio in relation to a financial year, the parties acknowledge that the board shall seek to maintain consistency from year to year by smoothing the effect of any variation in free cash flows that may be due to one off gains or losses in individual years, while maintaining the target dividend payout ratio on average over time.
For the purposes of this policy:
"Free cash flows" means net cash flows arising from operating and financing activities less replacement capital expenditure outflows; and
"Replacement capital expenditure" means expenditure incurred to replace existing assets to enable the network to maintain a similar level of operational performance.
Tax on dividends
Generally, Vector's dividends will have imputation credits attached. New Zealand tax resident shareholders may be able to use these imputation credits to reduce their New Zealand income tax liability on the gross dividend amount.
Vector will attach imputation credits based on the tax Vector has paid. As Vector's income tax rate from 1 July 2011 is 28%, and this is lower than the income tax rate of many individuals, some shareholders may have additional income tax to pay on a Vector dividend. We recommend that shareholders seek their own tax advice to determine the tax implications of a dividend derived from Vector.