Correction to M2 dividend forecast

After talking to management of M2 Group, we have discovered that their policy of paying out 70% of net profit as dividends relates to the reported net profit rather than the underlying net profit as we'd assumed in previous articles: M2 finds life in Dodo on 18 Oct 13 (Buy – $6.02), M2 takes a breather on 29 Jan 14 (Buy – $6.08) and M2: Interim result 2014 on 20 Mar 14 (Buy – $5.99).

Guidance for 2014 is for a reported net profit of $60m–70m, which implies fully franked full-year dividends of 23.3–27.1 cents and a fully franked final dividend of 11.8–15.6 cents on top of the 11.5 cents paid at the half-year. This gives a prospective dividend yield range of 3.9–4.5% at the current price of $6.00.

However, in previous articles, we incorrectly based our dividend expectations on 70% of the underlying net profit, for which guidance is $85m–95m. This led us to an incorrect dividend estimate of 33–37 cents and incorrect yield forecasts of about 5.5–6.2% (based on a share price of $6.00 – which is close to the share price for all our previous articles).

None of this has any effect on our valuation of the company or our recommendation. What matters is the free cash flow over the long term, not how much of it the company chooses to pay out in the short term. The only exception to this is if you don't trust management to use the cash wisely, but we're comfortable with management of M2.

However, we apologise if anyone has been misled by our mistake, and we've corrected the previous articles and provided this update to prevent any further confusion.

The stock is barely changed since 20 Mar 14 (Buy – $5.99). BUY.

Note: Our model Growth and Income portfolios hold shares in M2 Group.