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How are we supposed to buy theses shares at such outrageous spreads of 6-7%? This is my second largest holding and I was ready to add more at 2000p but not at the expense of paying a 7% premium to greedy MMs!

Getting murdered lately at 5 year lows. Will have to wait for Thursday to see if things are really as catastrophic as the SP indicates.

Taverham, how are you valuing the shares? The only way I found how to do it is using a dividend discount model (20.7/(9-3) = 345p) where 20.7 is the current dividend 9% id the required rate of return and 3% is the dividend growth rate. So at these prices it's about 15% undervalued IMO. I just added some shares today.

DOM shareholder here, I'm trying to understand DPP from an international new market perspective. From what I've compiled through the annual reports DPP has been making losses each year since 2010.

I'm trying to draw a parallel to what's going on in Sweden and Norway with DOM as losses are increasing and sales not growing. David Wilde (the departing CEO) had said "the UK business was loss making for the first 10 years", so is it expected in a new market to keep losing money for a decade before turning a profit?

“There is nothing wrong with the pizza market in Norway, and the competition is beatable,” he said, noting that the UK business had been loss-making for 10 years before turning a profit. This must be before the company went public as the income statement is positive since 1996.

I agree with deeplake. Most of the price action at this point and in the near future is driven by not only Woodford but many pension/hedge funds exiting tobacco stocks for 'ethical' reasons.

This downward trend in turn is creating panic among retail investors who think 'something must be wrong here' and start dumping shares as well.

On an objective and quantitative analysis the remaining shareholders can see that the fundamentals are still strong and are loading up the truck. When the trend reverses (people find a new 'evil' to focus on) we will see a strong reversion to the mean. I might be wrong but this is my thought process and thesis behind my investment strategy in tobacco.

atalatal

"Based on these numbers, my fair value for Imperial Brands stands at GBP 29.5 per share"

Good article. Not far from my number.

Simply Wall Street is just a mindless computer inputting numbers into a formula and spitting out a result. A proper DCF analysis with conservative numbers will give you the best approximation of the intrinsic value of a company provided you understand the business. This is what Warren Buffet, Charlie Munger and any other value investor use for evaluating the value of a business.

The value of a business is the sum of future cash flows discounted to the present value, minus the debt. In my model of IMB I was fairly conservative and still came out with a fair value much higher than the current share price.

Velo, when doing a DCF the most important thing is to understand the business so the future cash flows that are inputted should make sense. On a company with stable cash flow like IMB it is easier to do than for example a tech startup where FCF is all over the place.

Using the parameters below I get a fair value of around 31 GBP:

- 1.5% FCF CAGR next 5 years
- 1% long term growth rate
- 8% discount rate

So I find the stock to be trading at 40% below fair value which implies a very high margin of safety in case I'm wrong in my analysis.

One can also derive value using industry PE multiple as you did, or a Gordon growth model and try to triangulate a fair value estimate.

PS: Sharepad shows a target price of 28.3 GBP.

atalatal, who are you to stand in the way of true love! :)

In my opinion, Woodford is anticipating his shareholders to run for the gates once he reopens his fund and is loading up on cash by dumping shares, might be why IMB is declining faster than it's peers. Will keep dropping for a while until value investors swooping to collect the juicy well covered yield!

Hey Velo, sure would love to compare data anytime. Been happy most of the time with Sharepad, I particularly like their live data feature where you can link the data into excel and do a live refresh by pressing ctrl+alt+F9. I had a few issues with their FCF calculations that were being underestimated, but support was quite helpful and recognized it then changed the calculation.

Predictions are just that, we'll never get an accurate number and have to do the DD ourselves in order to get the best information possible.

Have you done any DCF analysis on IMB? If so what fair value did you come up with?

"I wonder - does anyone out there have a subsciption to "Sharepad"? I'd be interested what they're showing as the current projection for net debt this trading year ending September."

I do, the numbers I gave are from Sharepad itself :)

End 2019 projection for net debt is 11.053.B

One thing you can say about the tobacco industry is that it’s spectacularly profitable. That’s because smokers are relatively insensitive to price increases and the price charged by tobacco companies is often only a small percentage of the price paid by consumers.

For example, in the UK, tax typically makes up 80% to 90% of the price of a pack of 20 cigarettes. Under the current tax rules, if Imperial charged £2 for a pack of 20, the retail price would be £9.18 thanks to fixed and variable tobacco duty and VAT. If Imperial increased its price by 10% to £2.20, that would increase the retail price from £9.18 to £9.46. For most companies, a 10% price increase would drive customers away towards cheaper competitors, but most smokers I know would be unlikely to quit or change brands because of a 28p price rise.

This pricing power translates into extreme levels of profitability. By ‘profitability’ I mean free cash flow return on tangible capital employed. While the media and 'analysts' are pulling their hair out pointing at declining volumes, the above should be taken into consideration when evaluating the company on a fundamental basis.

Velo, I'm not sure where you saw that debt was projected to increase, can you please share the source with us? I'm genuinely asking because from the consensus forecasts net borrowings is projected to decrease by 0.6% in 2019 and by another 6.6% in 2020.

IMB has a plan to substantially reduce its debts in the years ahead. This debt reduction will be driven to a large extent by a series of large divestments which are expected to generate around £2 billion of cash.

To answer the second question, my answer would be that it doesn't matter. Having a positive earnings payout ratio is a "feel good" metric that some people need to feel safer, if you dig into the business you'll see that it is irrelevant to dividend safety.

Unlike reported earnings which are down over the last decade, Imperial Brands’ free cash flow per share has increased by more than 30%, with an annualized growth rate of 4%. That’s better than the company’s 1.6% annualized revenue growth and reflects increasing margins thanks to the company’s focus on cost cutting and higher margin products.

More importantly, free cash flow has covered the dividend every year, with an average free cash flow dividend cover of 1.9. Free cash flow dividend cover has been decreasing, though, going from around 2.5 a decade ago to 1.5 today. The reason is that management has seen fit to increase the dividend by an average of almost 11% per year for a decade. This makes for happy shareholders, but it isn’t sustainable. I agree that at some point in the next few years the dividend’s growth rate will have to be reduced if it’s to remain well-covered by free cash flows.

Irene is right, due to the huge acquisitions done in the past the amortization is massive circa 1B GBP per year. This is a non cash expense and dividends are still paid out from FCF, once the goodwill is completely amortized 'net profits' will start coming up and cover the dividend, but this will make no difference besides pleasing investors looking only at the payout ratio.

Tobacco companies have very little capex requirements, I can see the dividend growing for another decade to come but at a much slower pace than a 10% CAGR.

No love for pizza these past few days.. taking a major beating and will probably continue until we see some profits or at least sales growth from international. Why take on Sweden and ignore Stockholm is still a big mystery to me.

Don't really see the logic in the drop, seems all the sector is affected. Unless they're shorting packaging firms as a whole and throwing the baby out with the bathwater. DS Smith has little to no revenue from China and a small recent stake in the US.

Anyone have any insight on how the fundamentals would be affected by the current events which is scaring away the traders?

Any positive outlook on the shares now that the elephant has been let out of the room? SP looks cheap on a FCF basis, about 20% margin of safety based on my DCF model. Cost saving measures, Tower sales, reduced dividend, increased customer base should help in the medium to long term.

Would buy back in at around 110p when it reaches that level.

Why would VOD massively buy back its shares a few days before they announce a dividend cut? Does not make much sens unless they do not plan on cutting it. Thoughts?

13 May 2019

Vodafone Group Plc ('Vodafone')

ISIN Code: GB00BH4HKS39

Transaction in Own Shares

Vodafone announces that it has purchased the following number of its ordinary shares of 2020/21 US cents on Exchange (as defined in the Rules of the London Stock Exchange) from J.P. Morgan Securities plc ('J.P. Morgan') as part of its buy-back programme announced on 28 January 2019 (the 'Programme').

As per a poll by JP Morgan about 70% of investors agree to a cut and would like it to be by 30%. Does this mean that the SP might FALL in the case the dividend is maintained?

Personally I would rather see a sell off of the NZ masts at 1.3B GBP followed by aggressive cost cutting measures, this coupled with the extra cash flow from the Liberty Global acquisition should be able to maintain the current dividend without having to break the 23 year streak of not cutting the dividend.

IMB had crashed by 47% from Dec 2007 to October 2008 (so before the great financial crisis), it was all doom and gloom and everyone was touting the "end of tobacco".

Stock has increased by 70% since as well as raised their dividend 10% per year. Strong buy at these levels again!