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“All competitors up comfortably L&G useless as usual”

I wonder whether the difference between LGEN and other insurers and their SPs is not more to do with the type of insurance they deal with. LGEN creeps along with long term life insurance / retirement/ asset management and the like; Aviva seems to me to be more into house/car/medical/ insurance that is more short term so quicker to respond to the business environment. Which is better? Maybe that is whether you take a long-term or short-term view.

I recently cancelled my car/ house insurance with Aviva as the premiums were astronomical.

“Thoughts on what this will do?”

Damage the pension industry, and probably LGEN. Those who inherit pension pots will be hammered - could now only get 0.6x, or 0.45x, or 0.36x, or 0.33x of the pot depending on income tax. A double whammy indeed. Certainly the pots will be drained by the 25% that is tax free.

OK - here is my penny’s worth on the question that keeps cropping up as to what LGEN- or any other company for that matter - should do with its generated free cash for the benefit of the shareholders?

My thoughts are based upon my understanding of how Buffett/Munger view/viewed the intrinsic value of a company. Simply stated, the value depends on the totality of the sum of the future free cash generated by a company in perpetuity, discounted an appropriate risk adjusted rate, plus the present book value. From a fundamental point of view the SP should track the intrinsic value, but the market is often crazy.

As a reminder, a company’s free cash is the money left over from revenue once all business expenses have been accounted for. Buffett calls free cash “Owner’s funds”, which, strictly according to him, should only be used by the BoD in the best interests of the owners. So what is best?

In my opinion, the company has three main options to use the free cash for shareholder benefit when viewed from a fundamental point of view. This does not take into account the shenanigans of market players, or ill mental heath of Mr Market, or taxes and other costs.

These are:

1. Reinvest in the company to grow the business over-and-above the growth of the otherwise existing and ongoing business. Shareholders gain from co-owning a more valuable company and generating even more cash for them in future.

2. Giving back to shareholders with a dividend, which, if reinvested, benefits shareholders because they will own a greater share of the business, by holding a greater number of shares in the company.

3. Giving back to shareholders by buying-back shares and cancelling them. As with 2 shareholders will benefit from owning a greater share of the business, but, in this case, because there are fewer shares in issue for the same number of shares held.

So which is better from a fundamental point of view, excluding taxes and costs?

To me 2 , with dividend reinvested, and 3 both lead mathematically to the same increase in ownership of the company by the shareholder, and both are value enhancing if the price is lower than intrinsic value. As for 1, it seems to me, this is only interesting if the new capital (the free cash) employed leads to a greater free cash margin on revenue than would otherwise be the case for the existing and ongoing business. Otherwise it would be better to hand back the cash to the owners, as this would allow options 2 &3 to at least benefit from the free cash margin of the existing and ongoing business.

Paying dividends or buy-backs from the majority of the free cash seems to me to be appropriate for LGEN, and, on balance, I prefer buybacks to dividends for tax reasons. If it were not for taxes I would be agnostic.

“So, Mr António Simões, when's the next one starting?”

He answered this question in the Q&A session on 12 June. This will be in “future years”, I.e. post FY2024. Furthermore the amount of any increased hand-out will be represented by at least the difference between the 5% increase in dividends. This year and the 2% increase in dividends projected to 2027. So next year the buybacks will be at least 3% of this year’s total dividend times the number of shares in issue. In other words the majority of the proposed total hand-out to SHs will now be in share buybacks rather than dividends.

Thanks for the seekingalpha link Cosmochf. A well balanced review IMO, and worth the perusal for those like me who have not come across it before.

These are the proposals on how the IHT on pensions will work. Indeed the pension provider will pay the tax, not the estate executor. The estate executor will liase with the pension provided regarding the tax amount that needs to be paid.

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment

K-L. My understanding is that the pension pot will pass to the beneficiaries of the estate- as defined in the will. - as before but, whereas before the pot did not form part of the oh taxable amount, it does now. The estate will pay the IHT. The pot however will still be liable to income tax by the beneficiaries when funds are withdrawn from it by them at 0%, 20%, 40% or 45% as appropriate.. I am open to correction on this

A trust does not form part of the estate.

Thanks toltorisk. I’ve seen the form and am currently downloading all the income/expenditure info and classifying accordingly. Luckily Excel comes to the fore and has allowed me to assemble all the date as required by form 403. Without this it would be unfeasible as my affairs are far from straightforward.

A question is how do those in their twilight years , with some wealth in excess to requirement, manage their inheritance now IHT is payable on their pension pots?

It’s now a double whammy as beneficiaries will still have to pay income tax of up to 45% on inherited pensions, giving total tax take of up to 67%

I am now contemplating taking the 25% tax free from my SIPP, and setting up a discretionary trust with the excess income so created, as excess income is not subject to IHT. Then I will look to do the same with the 75% remaining if my tax situation allows for this to be efficient. My beneficiaries will then get most of the total amount of the pension, after trust charges and taxes - but at least the dreaded IHT on the pension will be avoided, and there will be no ifurther tax liability for the beneficiaries.

But it takes a lot of work keeping detailed records of all income and expenditure to satisfy HMRC that it indeed excesses to a normal pattern of expenditure.

Also to minimise the tax take I will give at least 10% of my taxable estate to more deserving charitable causes. This will only reduce my beneficiaries inheritance by 4% as there is still a tax break allowing the IHT tax to fall from 40% to 36% on the balance of the taxable estate.

All very complex - I was hoping that Reeves would have used the occasion to reengineer a most weird tax system, but alas, she has just followed tradition by tinkering with it.

Pokerchips. You are right - we investors have been hammered right royally by successive budgets. Dividend and capital free tax allowance down both actual and by stealth - and income thresholds down by stealth.

I was looking at it from the point of view were one to have to pay the tax. Dividend tax unchanged at 8.75% for basic rate taxpayers but CGT up 80% from 10% to 18%. This changes the equation for these taxpayers whether dividends or capital appreciation is better. My view is I would rather pay the 8.75% dividend tax than the 18% CGT. For higher earners CGT is lower (increased by only 20% to 24%) than dividend tax so the situation is different.

Well that could have been a lot worse. CGT up a little, and pensions to be subject to IHT, but the purpose of pensions was not to be used for IHT planning - so logical IMO. No change to dividend tax so good for LGEN investors.

Ok Pokerchips - I get the drift. Its is just the use of “profit” that I find confusing. To me profit is associated with income , gain to me is associated with a capital change. As HMRC explains it the fruit on a tree represents income - the tree itself is the capital.

Pokerchips. I’m not sure I understand what you are saying. Are you saying if you buy a share and then you sell it at a higher price this is a profit and not a capital gain?

Robleo - if you owned a farm, or had a share in it, would you worry what the market value of the farm is on a day to day basis? Surely you would be more concerned with yields and produce prices and the profits you would make. From a long term perspective , and from my viewpoint, I see little difference between this and owning part of a company.

May I suggest that the sign of a healthy business is not necessarily anything to do with the share price or the dividends paid.

To me the heath of a business depends on its fundamentals, and to view these fundamentals, it is better to consider the business as if it were a private company independent of market distractions. The fundamentals such as having a sustainable long term competitive advantage, good profitability (and translation of profit into fee cash), a high return on capital employed and a robust balance sheet are amongst the important aspects.

And then answer the question - would I want to own 100% of the company were I to have that possibility? If not, why pay to have a part of it?

The SP should, of course,eventually reflect the fundamentals, but Mr Market often exhibits manic depressive (bi-polar) behaviour and is best ignored unless buying and selling in my view.

My evaluation of the LGEN’s fundamentals suggests to me that LGEN is reasonably healthy, and has the potential to become even healthier once the structural changes are implemented.

Meconopsis: On a point of understanding, I thought the authorisation to buyback 10% of the shares lapses at the next AGM, so this does not give them authorisation to buyback after FY24 unless further authorisation is granted at the next AGM.

Also my understanding is that they are only planning to buyback $200m worth of shares this year. And that the next Final dividend (FY24 to be paid next year) will also be increasing by 5%, not 2%). This all according to my understanding of what they said:

“   The Board intends to return more to shareholders over 2024-27[5], through a combination of dividends and buybacks, with 5% DPS growth to FY24 and a first share buyback of £200m in 2024, followed by 2% DPS growth per annum out to FY27 and further similar buybacks[6].

[5] Compared to returns that would result from maintaining the current 5% per annum dividend growth rate over this period

[6] All capital returns will be subject to the market environment, our views on solvency buffers, and opportunity”

Clearly the solvency buffer is in the sights of the BoD as you have suggested would be the case

Service inflation in the UK is still about 5% - it is just the negative inflation rate for imported goods and fuel that has brought down the headline rate.

I hate inflation. Keep forcing the domestic genie back in the bottle Andrew - don’t be rash and cut rates too soon.

I remember buying sausage rolls for a shilling (5P).

Rzez I did do the calculations and Crossley is essentially right as I recall it, but I’m out of town at the moment. - if I get the time I’ll confirm or otherwise C’s calculations over the weekend.

I guess LGEN asked for authorisation to buy-back 10% of the shares this year at the AGM as they were mulling over whether to replace dividends with share buybacks. It would not have gone down well I suspect - a bird in the hand and all that vs the whims of Mr Market.

At the May AGM we, the shareholders, gave LGEN the authority to buy-back 10% of the shares in issue this year - to be held in treasury or cancelled -by way of a special resolution #25 . In the explanatory notes at the time LGEN said that, at that time, there were no current plans to undertake share buybacks.

Subsequent to the AGM they announced that they would be buy-back £200m worth of shares this year and cancel them, while at the same time saying they would reduce the per share dividend growth rate from 5 to 2%pa after FY2024.

As there will be fewer shares in issue after the buyback and cancellation, and as the 2% projected increase in dividend is per share, LGEN’s dividend cost (div x shares in issue) will be lower that it would have been had the share buybacks not have been implemented.

Meconopsis makes a valid point. It is the market value (SP x # shares in issue) that has been falling. For capital value look at the balance sheet. If the company does not spend all its free cash flow on acquisitions (if capital dilutive) , dividends and share buybacks the capital value will rise - seemingly the case with LGEN.