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Denby269 . I take it you are fully conversant with IFRS4 and IFRS17 and the impact on revenues and earnings?

‘Buffett has underperformed massively over last 5yrs.” According to Driftking27.

Fact:Buffett’s low risk fund is up by 75%over 5yrs the same as S&P500. World index up 60%.

I am a great fan of Buffett’s investment philosophy and logic which informs my approach. It has, and still does, served me well.

A brilliant company I have held for 30yrs with great economic benefit. Mr Market sometimes reacts in excessive ways which can often, IMHO, be ignored. I continue to hold with great confidence in the company and its management.

Divi-collector. I do see the merit in your approach - akin to pound cost averaging - which alleviates a lot of the pondering on whether to buy at a given time. In the past I used pound cost averaging to buy into funds every month - and it works a treat.

I hold a wider portfolio - too wide perhaps - in both funds (ETFs. OEICs and Trusts) and about 25 individual shares both National and international. LGEN is part of my buy-and-hold collection getting little day-to-day attention.

“But, why are you not selling at 270p+ ?‘

Good question. I only buy when I think the price is well below my view as to its intrinsic value to allow for a margin of safety. As a long term holder I will only sell if the price is unreasonably high above my view of intrinsic value and I have better long term opportunities elsewhere. In the interim I ignore the SP.

What price would I consider selling at? Probably I might become interested at 300-350p were this to reflect a major change vs its value vs the market as a whole. I would also consider selling at any price if I thought the company lost its way. I think this is far from the case with LGEN and it is sharpening its focus and improving its competitiveness.

I gave up a long time ago trying to time the market. I just try and invest in quality companies (brand, moat, competitive advantage and all that) and prefer to hold forever through thick and thin.

The approach works for me. Others may focus on the SP movements alone to inform their decisions.

‘What do CITY GROUP know we are over 251 now :-)”

I would suggest not a lot. What they are saying is that according to their assumptions and calculations, LGEN is overvalued. Which may or may not be the case depending on one’s point of view.

City are almost certainly using discounted cash flow models to come up with a valuation.

And you can get huge variations in outcome depending on the assumptions used. Without knowing these assumptions their figures have little to no meaning IMHO. What yield do they want from their investment is the question I would be asking in the first instance?

These dcf models depend, amongst other, on estimates of future cash generation discounted by a number that will in some way reflect gilt yields plus a risk premium. The outcome is,accordingly, quite sensitive the discount rates used

For example.£100 generated in 5yrs time would be worth now, according to dcf, £78 when discounted at 5% pa and £62 when discounted at 10% resulting in a significant change in a calculated valuation.

It’s obvious of course, but if you want to get a !0% return for you investment you would want to pay much less for it than if you want only 5%.

To get a 10% long term return, with a healthy allowance of a margin for error to mitigate possible loss, I still will not add to my holding at SP above the 220=230p range. But each to their own.

‘the State Pension not viewed as what it was designed for? A safety net “

It was originally designed as a collective Assurance Scheme for everyone. Just as with any other assurance scheme it is a right to a certain income having paid a premium - it was never meant as a benefit to be subjected means testing. That is the purpose it was originally set up early last century and modified post WW2.

Fleccy. The figures for the two models look familiar, so AI is doing its job.

And I agree with you regarding compounding being the name of the game. If you have one share now, and you reinvest the dividends, an 8.5% dividend yield will mean you will have 2.26 shares (a 126% increase) in 10 yrs all other things being equal. So £100 invested initially will grow to £226 through owning more of the company even if there is no SP increase. Add on only a modest increase in the SP and the returns aren’t too shabby.

Incidentally were the company to retain the earnings and grow the business by 8.5% a year, the company’s value would grow by 126% over 10 yrs, and so too should the SP all other things being equal. So as a shareholder your initial £100 will grow too - to £226 - but through SP increases rather ownership increases. But if the Company can grow the business faster than 8.5% pa, this would be the preferred option. Few, if any, insurance companies can.

I think the intrinsic value is import to inform one’s decision to buy and sell - at all other times, as a longterm investor, I ignore the SP.

Fleccy - the problem is each method the propose, will give a very different answer. Thereby the problem with analyst figures that vary hugely.

For my sins and in my previous life, I was, for some time, involved in project evaluations in the mineral/petroleum industries when dcf was the only methodology use to determine the NPV against the company’s hurdle rate Because of this experience I think dcf analysis is the only approach to evaluating a company’s valuation - as long as it is used with great care as there are limitations.

Simply Wallstreet’s evaluation using this methodology is a meaningless without sight of the free cash flow projections and discount rate used. The figure they come up with is nonsense, IMO, if one wants a 10%return ( discount rate) from your investment.

The problem is that my understanding of LGENs accounts is limited, so the only way for me to get some hold on the valuation for this company is to project the handouts in dividends and buybacks and inflating these values forward by 2% pa - and using a discount rate of 10% which is the return I want to get from my investment. This indicates to me that LGEN is marginally overvalued at current SPs. Right or wrong, this informs my investment decision.

Longterminvestor is correct, in my view, stating that a valuation of a company, and any share in it, is not determined by dividends alone.

Which begs the question: what is the value of a company? How do you know if it is over- or undervalued?

If LGEN were a private company there would be no crazy Mr Market to tell what he thinks it is worth. But a private company surely has a value nonetheless - an intrinsic value - which, Buffett and others, argue is determined by the value of the assets and the deemed future cash generation possibilities discounted at an appropriate rate. They argue that Mr Market’s valuation of a public company should basically track the intrinsic value, but noting that Mr Markets can at times be as nutty as a fruit cake.

When SPs go up Mr Markets happy to pay more for shares than they are intrinsically worth, and when prices go down he dumps them for less than their true worth.

So when people say a company is undervalued or overvalued, I rarely understand what they mean. What is the benchmark on which to arrive at an opinion? What valuation are they talking about - intrinsic or Mr Market? What future earnings growth are they basing that evaluation on. What overall return do they require (discount rate) given the risks to the business?

Or is it all based on some crystal ball foreseeing what Mr Market will do next?

We all have different philosophies, risk appetites and are at different stages of our investment journeys. Our investment outlooks will necessarily differ greatly.

I try and keep portfolio of investments with a balance between value, growth and speculative stocks - currently weighted too heavily in the latter so am currently rebalancing. I have held LGEN as a value (cash cow) stock for a long time and would like to increase my holding at the expense my speculative stocks like Nvidia et al., but will only do so at prices well below what I think is intrinsic value. For me 220 - 230p is the right price range to think about increasing its weighting. Other value stocks are on my radar if this never eventuates, but I will not buy at these prices. Patience is now the name of my game - something I learned in the school of hard knocks.

And here is the reasoning.

“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

“Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying.

“This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

If you are a long term investor, the logic is surely that you would like to have low share prices. Buffett is good at explaining why with his hamburger analogy.

“Warren Buffett’s "hamburger logic" is a famous investing analogy meant to cure the average investor’s irrational fear of market downturns. He argues that if you plan to be a net buyer of stocks over your lifetime, you should hope for lower prices—just as you would when buying groceries.”

“Let's all try to be realistic. “

What I have learnt investing over decades is that Mr Market is often unfortunately far from realistic. His mood swings from ecstatic and overly optimistic to depressingly pessimistic often with no clear reason - he is bi-polar and results in a disconnect between price and fundamentals.

Although I don’t count on it, I don’t discount a fall back to something like 220 sometime caused by Mr Market’s mood swings even if the fundamentals remain intact.

KD - Sticking to decent dividend payers is one approach. But most of the high dividend players like LGEN pay dividends or buyback/cancel because they cannot effectively use this money to reinvest in their businesses to grow them.

It is, IMO, worth while also considering some established companies that can, and have a long history in doing so. One such company is Halma that has done well in this regard. However, it is currently expensive, so perhaps one for a research and watch list waiting for a better entry price. With the small dividends reinvested my holding is now worth about 30x what I paid for it albeit a long time ago.

Tg -To answer your question, let’s first consider- what is the value of a company? One can look at it two ways.

The first way is the value of a company decided by Mr Market - the market value or market capitalisation defined as SP x shares outstanding. Mr Market is bi-polar so sometimes the SP and capitalisation is crazy.

The other way is to look at it the other way around arguing that the SP should reflect the inherent value of the company - a share is after all just a certificate of part ownership. So in this view the SP should reflect the value of the company and not the other way round. That is the SP is the company inherent value divided by shares in issue. The inherent value of a company can be thought of as being the sum of its book value (or better its liquidation value I.e. cash left over when all assets are sold off) and the discounted value of all future free cash flows.

So if a company gives away cash in dividends its book value and therefore inherent value will fall as will the SP to reflect this. Then when the company accumulates cash again through earnings its inherent value will rise and the SP should again reflect this and rise again. I think of it as being like a saw tooth - a sharp dip followed by a slow rise before the next fall and so on. The saw would be flat if it gives away all its earned cash each time, but slope upwards if it retained cash to invest, and downwards if it gave away more cash then it earned.

That is the idealised situation - Mr Market will add noise.

The price falls on ex div day, rather than payment day, because shareholder no longer have the right to the dividend after ex dividend. The fall in SP and drop in inherent value of the company on pay day is a little out of phase for this reason, but I don’t think this negates the concept presented above.

Adeg1 - unfortunately you are correct - mostly. The problem is that if they buyback when the shares are “expensive”, it is is not a good idea as it is value destroying. Just as it is not a good idea for us to buy shares when they are expensive (if long term investors).

Unfortunately Execs are incentivised on metrics like EPS - so they don’t care. If the BoD we’re doing their job properly to look after our interests, they should only buy allow buybacks when the SP is below “intrinsic value” - as defined by Buffett. Buffett has been quite vocal on the matter, and leads by example by only buying back shares in BerkshireHatherway when he considers them to be below intrinsic value. It can be done!

Phyl- it may just be a question of tax for those holding outside tax shelters.

Basic rate taxpayers may wish to have the dividends as they pay 10.75% dividend tax and 18% CGT.

Higher rebate taxpayers may wish to have the capital gain as they pay CGT OF 24% and dividend tax at 35.75%.

"Is it true to say that if the LGEN buy back = 10% of outstanding shares . Does it follow that the SP will rerate in a 10% increase following the end of the scheme?"

I think the answer is yes from a purely fundamental point of view, but not immediately, and only if the company continues to generate cash. The mood of Mr Market is something else.

Consider the following conceptual model.

Say a company has an intrinsic value of £1m and has 1m shares in issue - so the share value (SP) is £1. If it spends £100k on buying back and cancelling shares at £1 per share, its intrinsic value will fall to £0.9m as it gives away cash but, as there are now only 0.9 million shares in issue, the SP will still be £1.

Then when the company rebuilds its intrinsic value by accumulating earned cash to say £1m again over time, the SP will increase to £1.11 ( £1m/0.9m).

Meconopsis. Thanks for your ongoing informative posts.

On the SCR, there is perhaps, to my mind at least, another aspect to the question - and that is from the point of view of their customers. Personally I only take out insurance when I can’t cover the risk myself. So when I do take out insurance on big ticket items, I want my insurer/assurer to have gilt edging, so I would be happier with an insurer with a higher SCR than a lower one, and prefer to give my business to them. That is my view, but I’m not sure anyone else sees it this way.