1fruitcake great words of wisdom, I've only been trading for little over a year and set out my strategy for the long term vowing to 'ignore the short term noise'. I found that it has been easier said than done as we're being bombarded by 'Breaking News' and updated prices every second, but still stick to it as I try to do my DD before buying in and as long as my thesis holds it doesn't matter what price other people are willing to pay for my shares.
I sometimes wish we could return to the pre-internet era where you were not expected to be reachable for 16 hours a day!
I wonder if we're looking at a self fulfilling prophecy here, the market feels the yield is too high therefore something must be wrong, driving the SP down and the yield even higher. An even higher yield must mean something is REALLY wrong, SP goes down even more etc..
Even though I don't see a need to cut the dividend on a fundamental basis, the new CEO might be forced to do it if only to drive down the yield and give a perception that there is more room for Capex. In the meantime paying 5 times FCF for a company with robust earnings and strong pricing power seems like a bargain. Sentiment might drive the price down further but value is definitely there.
These are not goodwill write downs, they're intangible asset amortizations following IFRS standards. Even at full value companies need to pass these entries every year. In any case it makes no difference to the dividend affordability.
Dividends are paid out in cash out of the free cash flow of the company, IMB has ample FCF to cover their dividend and then some as I've demonstrated in my earlier post.
Skeletor, IMO most people are cheking the 'dividend cover' figure on websites like Yahoo, FT, etc.. and seeing that it's less than 1 therefore claiming it's not covered.
If you actually look at their annual report you can see that each year there is a very large non-cash expense due to amortization of previous acquisitions, if you look at the cash flow statement which I have used in my previous post it shows that the dividend is more than covered by FCF, even after paying interest.
If these are the kind of people selling off it is very good news and they are lowering the price point for me to load up the truck!
Andy, can you elaborate why "Given this the dividend at the current level is unsustainable imv."?
Net cash from operations: 3,236
Interest paid: 488
So it give you a FCF figure of roughly 2,339 after interest expenses. Dividends paid was 1,844.
Therefore IMB still has an excess of GBP 495 M to either buy back shares, pay debt, invest in NGP. I don't see a risk to the dividend specially now given the new slower growth policy.
It seems to me that many people in here should not be investing in individual companies as they have absolutely a very weak understanding of basic accounting. Unlike VOD which was not able to support their dividend with FCF, Imperial is still well covered by cash and will be for years to come. Claiming that the dividend is not covered by earnings based on reported EPS is very shortsighted and shows that they did not bother to dig into the numbers to understand that there is a massive GBP 1.3B non-cash amortization expense added every year from the past acquisitions. If people like that are the reason for the SP decline it gives me confidence to load up the truck.
- 2018 FCF (after paying interest) of GBP 2.2 B
- 2018 Dividend equities paid of GBP 1.7 B
- Debt has been reduced from 12.5B in 2015 to 9.5B in 2018
- Net Debt/EBIDTA ratio decreased from 3.7 to 2.7
- Interest cover increased from 4.1 to 5.7
This gives them about GBP 0.5 B per year to pay down debt, and buy back shares at bargain levels. Assuming no growth in FCF debt can be reduced further and accelerated by the new cost saving measures and asset divestitures.
Maybe I'm missing something glaringly obvious which has everyone running towards the hills, but see absolutely no reason why they would cut the dividend.
Strange, IMB has cut down its Net Debt/EBITDA from 3.7 in 2016 to 2.7 in 2018 ans has increased its interest cover from 4.1 to 5.7 in the same period. If anything the balance sheet is looking healthier than it was a few years ago..
"The writedown and current trading was well flagged in the recent trading statement"
I don't see how they were in line with guidance. From the July trading update:
"· The Group continues to trade well and expects to report full year profit before tax in line with the current range of analysts' expectations (1)
· Full year result to include £40m of previously reported exceptional items
(1) The company compiled range of analysts' forecasts for profit before tax after taking into account exceptional items for the year ending 30 June 2019 is
£112.7m to £116.4m based on forecasts as at 16 July 2019."
Profit before income tax (post exceptional) 104.7
Exceptional charges 50.8
I'm sure the deletion factor is already priced in at these levels, I just initiated a position with 200 shares. Looking at the fundamentals things do not seem as catastrophic as they SP is reflecting.
- Strong FCF that can more than support the dividend which is at a very attractive 9% covered twice by earnings
- Strong balance sheet, net debt/ebidta stabilizing at 2.7
- EBIDTA margins of 40%+
- Sales declining mostly due to HPE exodus, maintenance fees decline is the bulk of the revenue and falling much slower than other segments
- Very low fw PE at 5.5
- DCF using conservative measures even with negative growth rates suggest a fair valuation of 15.5 GBP, implying a 30% margin of safety
From what I see (and I may be wrong) the collapse in the price is due to shareholder exhaustion after the barrage of profit warnings and uncertainties around the HPE integration. IMO these concerns are well prices in and I see MCRO as a deep value play that comes with some risks but more upsides.
Any long term holders' opinion on the above thesis more than welcome :)