Member Info for FFObsessed

Doth mine eyes deceive me?

I am up 10% overall. I more intelligent man, would probably sell or trim. But not I. Not I.

"We inevitably got some things wrong, creating 6-12 months of difficult growing pains. This led to Iain and others understandably asking if I was the right person to be CEO.

Naturally, I told everyone to “p*ss off”, refused the notion of a new CEO, and fought everyone every inch of the way while fixing the growing pains with the help of John Gallemore. "

Wow... That's all I can say. Wow.

There are 100s of similar cases though. Could cost them billions in the long run. That's why people are panic dumping. Overreaction I think as they'll appeal, maybe get the award reduced. Other cases may be thrown out etc. But it's not a good situation. If I'd known about this before buying the dip recently I'd have stayed clear. It's only a small position so I'll hold for the long term and see what happens. At least they're buying back shares and paying a dividend in the meantime, but it's definitely a worrying situation. Buying Mead Johnson was a massive mistake. Can't think of too many large corporate acquisitions that have ever paid off.

Guess it's time for me to start building my position again. Crazy how US is all-time high. Japan, all time high despite recession. Germany, all time high despite recession.

China/Hong Kong and UK in the toilet. Time to deploy the rest of my cash here and hold.

Excellent points. I'm definitely going to make this the biggest position in my ISA.

£10-10.50 is a pandemic low point. I'll definitely be pilling in it at those levels. I doubled my small position here this morning when it was down 10%, happy for it to keep dropping further.

THG's FY 2022 revenue was £2,239.2m....

Just bought a small amount of Burberry shares for the first time. Only started with a small £3k tranche. Will continue to buy if it keeps dropping. The valuation looks good at the moment.

I'm actually... in profit. Never thought I'd see the day.

Train said he was sticking with the stock: "On balance, we do not believe the warning about Latin America invalidates the investment case for Diageo, frustrating though it is."

https://www.investmentweek.co.uk/news/4155876/nick-train-buys-diageo-despite-profit-warning-hit-finsbury-growth-income

U.S inflation dropped to 3.2%. Everyone's probably expecting rate cuts H2 next year now.

Wish my dead cat would generate £1.8B in cash on a market cap of less than £5B.

RIP Dibbles

It had to jump up on the day my dividend is going to be invested, oh well not complaining. I'm now in the green.

Yet another example of why trading shares when they're cheap is a stupid strategy, buy when they're cheap and hold. Even if this rise gets sold off, just keep buying at the low points and hold.

An extra £400m cash generation for the year is amazing even if it's just a one off.

Strictly, just noticed my post was cut off. Just a couple of extra points that were lost with done added waffle. You can't kick a dead horse too many times!

When you compared the book value from 2009 to now you are comparing two different reporting standards. To get an accurate annual increase in book value you'd have to convert the old book values using the same IFRS 17 reporting standards. The old book values were over inflated due to the way companies recorded their contract service margins. Therefore it is not true to state they have only grown book value 0.7% a year. CSM + Book value is now 241p a share but you can't use that as a direct comparison either. The financial health of the company has not changed by the difference in reporting.

In terms of ROE, as the recorded book value has decreased the reported ROE will now increase! L&G had a a ROE in 2021 of 20%. In 2022, 21%. With the new updated more accurate book values, H1 2022 ROE has increased to 31%. The H1 figures for 2023 has ROE at 37.1% when the non cash charges due to market fluctuations are adjusted for. This is an important point that Warren Buffett has also raised, for a company with a large investment portfolio, it's best to look at operating profit for the underlying profitability of the business.

Legal & General are at the top end of the industry for ROE and do not need to double their ROE to maintain dividend cover. Like any other businesses they just need to grow their cash generation at the same rate as dividend growth. A further decrease in AUM due to volatile markets could prevent that but they are well covered anyway. Realistically it's possible we could see a dividend freeze with further market declined but as I've locked in a 9.5% dividend recently that wouldn't bother me in the slightest. Even a slight cut is no issue. But this is a long-term investment, the kind you hold for decades, don't expect a quick re-rating and expect the usual exciting volatility!

Good luck everyone with all your future investments.

Strictly, a very apt metaphor, thanks for sharing it. I am glad you've come to the conclusion that L&G is not an investment for you, hopefully I've helped you reach that conclusion and it is a perfectly reasonable stance.

A few things though. Going into negative book value does not automatically put you into insolvency. The UK Supreme Court actually ruled on this in 2013. If you go into negative book value there is a balance sheet test that occurs which determines whether or not on the balance of probabilities, that a company will have insufficient assets to be able to meet all of its liabilities, including prospective and contingent liabilities, as and when they eventually fall due. This test still takes into account cash flows when determining a potential insolvency.

Also you seem to be under the impression that L&G are heavily leveraged. Now, this is obviously due to the massive liabilities on their balance sheet of almost £500B. This is not leverage, if it was they'd be bankrupt already, as I've already mentioned in my previous post these are pension payments, annuities, life insurance payments etc. You can see the breakdown as mostly insurance and investment contracts. A lot of which may never even have to be paid out but they are experts in calculating this. These will also be entirely covered by bond payments.

Now, the actual borrowings of L&G, you can see are around £5.3B with an annual interest payment of around £180m. They also have £14.5B in cash and an operating profit of around £1.9B currently. The earliest maturing core bond is also like 2045.

As I've also already mentioned they have a Solvency II Coverage Ratio of 230%. Insurers are required by the financial authorities to have at least 100% of the capital required to cover all future liabilities in the case of any possible market losses occuring over the next 12 months. 230% is obviously a very good SCR, at the top end of the industry. Also note that the £16B cash they hold for solvency coverage is separate to the £14.5B cash on the balance sheet.

I'll stress again that the IFRS 17 accounting principle has not weakened the balance sheet, although it looks like they have it is simply a difference in reporting. Infact the total equity (£5B) and the new CSM value of around £13-14B that will eventually be realized as profit is greater than the previous total equity value of £10.5B so if anything it appears to have strengthened their financial position, although in reality nothing has changed. The CSM + Book Value of L&G is 241p a share an increase of 1p on last year's updated balance sheet . A new accounting standard wouldn't drop the total equity further, this was entirely about recording future cash flows more accurately and also one of the principles of the the new standard is, funnily enough, reducing the volatility of the total equity value of insurance companies.

Anyway, I think I've probably bored the pants off enough people and we should probably

No worries strictly. If you mean the sharp decline of £5.5billion off the shareholder equity seemingly just for this year, that is due to a new accounting principles being introduced in January 2023. It's called IFRS 17. The latest report was the first to implement it. However L&G have actually updated their 2022 balance sheets to the new standard so you can see it's only really dropped from £5.5B to £5B over the last couple of years, due to the decrease in asset values from declining markets, although liabilities have gone down significantly as well.

The IFRS 17 principles introduced something called contractual service margin. I'm no accountant but essentially instead of realizing future insurance profits up front you realize them as profit periodically. You can see the change in retained earnings I believe. L&G have about £13-14B of CSM which will be realized as profit over the future years of the contracts.

The new accounting standard has no effect on the solvency, affordability of dividends etc. Just a difference in recording. Another example of why book value for these types of companies is not the best investing metric, assumptions can change wildly with new accounting standards. Cash generation is all that matters in the long term and L&G are an excellent cash generator.

However, you are 100% correct that if you don't understand an industry or a business, you shouldn't invest in them no matter how cheap they appear and I would not recommend any investment to anyone but at the recent price of just above £2 I think they offer incredible long term value even if it will take a few years to recover.

I've also noticed a lot of people talk about book value a lot, I know that's popular with housebuilder investors and I'll admit it's probably more relevant with housebuilders than other types of companies but I'll leave you with Warren Buffets opinion from 2000:

"The very best businesses, the really wonderful businesses, require no book value. They -- and we are -- we want to buy businesses, really, that will deliver more and more cash and not need to retain cash, which is what builds up book value over time...

In our case, when we started with Berkshire, intrinsic value was below book value. Our company was not worth book value in early 1965. You could not have sold the assets for that price that they were carried on the books, you could not have -- no one could make a calculation, in terms of future cash flows that would indicate that those assets were worth their carrying value. Now it is true that our businesses are worth a great deal more than book value. And that's occurred gradually over time. So obviously, there are a number of years when our intrinsic value grew greater than our book value to get where we are today...

Whether it's The Washington Post or Coca-Cola or Gillette. It's a factor we ignore. We do look at what a company is able to earn on invested assets and what it can earn on incremental invested assets. But the book value, we do not give a thought to."

Legal & General are an asset manager, life insurer, pensions manager, bulk annuities and more. They have had significant reduction in AUM management over the last two years due to rising interest rates and people pulling money out of investment funds. Their assets under management have dropped from £1.4TRILLION to around £1.16TRILLION, this and equities going down with declining global markets would be the cause of total equity being reduced. Scary amount right? Does it matter though? Well, firstly be aware that these assets are held on behalf of the funds, L&G haven't lost £200B+ of assets they've lost the fees associated with managing these assets for people in these funds. So this explains why L&G made about £2.2Billion operating profit a couple of years a go, now they are making around £1.9Billion with the reduced AUM. A decline but not a significant one when taking into account the market cap drop from peak to recent lows of about £6B. This should certainly catch the attention of a value investor.

In terms of impairments, when it comes to their life assurance and pensions/annuities they will invest in bonds which give a guaranteed income to cover their massive liabilities. These bonds will have declined massively recently in the sell off, massive impairments coming? No, because companies like L&G and Phoenix etc will hold these bonds to maturity when they will receive their entire investment back and re-invest them, this is why these companies are not obliged to report such impairments under financial rules unless they could cause a "substantial credit risk" for example bond defaults. So for these types of companies there is something called a Solvency II Ratio. Here is the definition:

"A solvency ratio, or leverage ratio, is the financial metric that measures the relationship between an organisation's debt and its cash flow. A solvency ratio is a helpful way of establishing an organisation's ability to pay off its long-term debts."

Legal & General has a Solvency II Ratio of 230% which is very good. This is more important than book value, and those large liabilities are not leverage they owe to banks, it's people's funds, lifetime pension and annuity payments, life assurance payments etc.

Legal & General currently make a profit of £1.9Billion on a market cap of around £13B. Have a strong SCR of 230% and pay a 9% dividend, with the expected increase in the final dividend, covered 1.6 times by earnings.

What are the real world risks though?

1. Interest rates stay high for a long time, reducing AUM further and reducing operating profit further. Result? Dividend is well covered and can still be paid, most likely frozen at current level or reduced.

2. Massive economic meltdown causing mass bond defaults. Result? Significant risk to the survival of the business. Likelihood? Incredibly rare and as they still paid a small dividend through 2008/09 crisis they are clearly a very well run business.

Definitely a bad move as I also topped up a few at 62.28. Here's to losing another few grand a day for the foreseeable future 👍

Agreed. Selling for ~£100million when we have £70million+ net cash is laughable. Board wants a quick payday.