Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
RetiredCopper, the Disposal RNS stated that the proceeds would be used to reduce debt. I've noticed various shareholders and commentators complaining about IMB having too much debt even though it is less levered than BATS. The cigar business was sold for an 11.8 multiple to EBITDA which is about 8.5% as an earnings percentage. So we've sold a premium business with world-class brands and strong pricing power earning us 8.5% a year (on sale price) in order to pay down some bonds costing us 3.5% a year in a world of 0% interest rates. My only hope is it keeps a few of the 'squeaky wheel' shareholders quiet for a while...
@andsoforth: For 2019 net cash generated from operating activities was £3.2bn and the dividend cost £1.85bn, which leaves £1.35bn for capex, interest payments, and debt reduction. In what way is the dividend not fully covered?
Could you also explain why you think things may be stronger at BATS? As of 2019 BATS had £42bn net debt to £9bn operating cash flow which is a 4.67x multiple whereas IMB had £10.5bn net debt (includes recent cigar sale) to £3.2bn operating cash flow for a lower multiple of 3.28x. Another way of looking at it, if IMB directed all cash flow to debt reduction it would take just over 3 years to pay it off, compared with almost 5 years for BATS. Now I understand BATS has arguably better brands but from a financial perspective IMB looks in better shape as things stand.
Martin, I've been a holder here since the share price was around £30, initially I thought I was getting quite a good deal with a 6% dividend yield haha. The company has said on two separate occasions that there has been no material impact to trading due to the pandemic so in cash flow terms things should be OK. It also appears being stuck at home has increased alcohol sales so I wonder whether there may be a crossover with tobacco as well? Personally my two main concerns are (1) new CEO slashing dividend when he joins in July (2) government deciding on a windfall tax for sin stocks to raise tax revenue i.e tobacco and alcohol. I don't pay much attention to NGP at Imperial, I wish they'd stop throwing money at it and just let the core tobacco business run-down so they can return as much cash to shareholders as possible. I'm hoping the new bloke sees the writing on the wall and makes us nice and easy to gobble up by reducing debt, reducing brands and stopping NGP capex. ATB, Tom
I think the dividend should be paid as investors rely on this income in the same way that employees rely on a pay cheque. Going forward any company that suspended the dividend during this pandemic will have a black mark against them in my book and a discount applied to the price I'd be willing to pay for shares. LGEN passes the test and I've added to my holding earlier in the week. Direct Line fails the test but only because it caved to the regulators, it has the cash available and a strong balance sheet so I'd be willing to forgive that going forward. There are many other companies that have suspended dividends without being coerced by regulators and this may suggest their businesses are not as resilient as others.
It's not as easy as that though as there are an awful lot of companies that couldn't handle a year with no revenue without running into solvency issues, breaching covenants etc. which would result in the equity being worth close to zero whilst the creditors pick at the scraps. The last few weeks were enough to finish off Cath Kidson, Laura Ashley, Debenhams... another 4-12 weeks of lock-down will likely see more added to that list. Having said all that I picked up some LGEN @ 1.75 first thing Monday for the ISA, here's to hoping they can weather the storm!
I'm yet to invest here but want to run through some numbers based on the current share price (as of 2nd April 2020) of the public holdings that SLA own. We have 19.97% of Phoenix which is worth £830m, 26.91% of HDFC AM which is worth £1,300m, 14.73% of HDFC Life which is worth £1,360m as well as 50% of an unlisted Chinese pensions company that contributed £17m to profit in 2019. If we simply add up the totals (based on the current share prices i.e. after the COVID haircut) we arrive at £3,480m. If we subtract the £3,480 from the current market cap of SLA we arrive at a figure of less than £1bn for the existing SLA business, having stripped out the public holdings. The existing SLA business made about £300m in adjusted operating profit in 2019. So if SLA were to sell all the public holdings at the current price we'd be left with a business earning around £300m a year with a market cap of £1,000m - that's a 30% earnings yield! Now I understand asset managers will be under pressure for the foreseeable but that price takes a lot of that into account already. As there's so much else on sale at the moment it may be that I don't end up investing here, the financial statements look a bit of a mess to be honest. If anyone has any thoughts on the above I'd appreciate the feedback. Cheers, Tom
Note: I understand SLA recently sold a chunk of HDFC Life but the overall point still stands.
Interesting article thanks McDoog. I believe assets under management should be £1.2 trillion (not billion), although I bet the last few weeks have knocked a bit off that figure by now! I picked up a few more on Friday @ £1.57 which is essentially the last reported book value of the shares. Buying at book value or less has proven to be a good long-term strategy here so fingers crossed it works out again. Having said that, I believe there is more pain to come as LGEN got sold all the way down to 30p during the 2008/9 financial crisis and this has a similar feel about it. ATB
The current policy is to increase dividends in line with business performance from a base level of £2.07. However, we have the new bloke starting in July so there is the potential for changes to be made. H1 results in early May might shed further light as they'll declare the interim dividends.
Thanks for the reply Mike, I actually think we agree on the fundamentals. I usually prefer to receive cash in the form of dividends over buybacks so I can make my own decisions on how to use it (whether that's for more shares or a new car is up for debate). It's my view that in this situation the surplus cash from the asset sale would make more sense as a buyback (or special dividend) than towards debt reduction due to the cost of debt being only 3% or so.
As an aside, do you have any income stocks you are currently looking closely at? For me Direct Line (9% dividend) as well as Jupiter (7% dividend) have caught my eye, especially since both are sitting on net cash. Those dividend yields include specials but these are usually paid every year.
P.s. regarding the 13.6% it should really have been labelled as earnings yield.
ATB Tom
Debt and equity are simply different ways to finance a company. At the moment equity costs the company 10% a year whereas debt costs it around 3% a year. It's like saying you should pay off a 3% fixed-rate mortgage over a 20% APR credit card because mortgage debt is bad.
Not sure I agree that the BoD would get sacked either, buying back shares at £20 yields a return over 13% (£2.72 EPS / £20 SP = 13.6%). This is higher than the 13% hurdle rate for projects with the added benefit of no operational risk. Would you rather 13%+ guaranteed or throw some more money at loss making NGP?
I think we'll have to agree to disagree, however as a shareholder myself I want the board to take the share price into account when making capital allocation decisions. If they could emulate Next PLC with their calculation for equivalent rate of return then all the better (check how Next has done over the last 12 months). Just as a final point, if the dividend yield was 3% and debt was costing us 7% a year then I would totally be with you that debt should be paid down as a priority - but we're just not there yet. ATB
Looking good here, I'm within touching distance of my cost basis now. With BATS hurtling towards £35 this should really be mid-to-late 20s in a rational market, albeit slight discount due to CEO leaving / weaker brands... but you get the idea.
You'll receive 72p per share on 31st December which will bring the re-based cost price of shares purchased at the current market level to £16.25. If the dividend is maintained at £2.06 then that is a yield of 12.7% moving into 2020...
I really hope management isn't selling the premium cigar business to pay down some bonds that are costing it less than 4% a year in interest. I bet the return on the cigar assets is higher than that and with some growth prospects to boot! The current interest costs them £500m a year which is highly affordable for a company generating almost £3 billion of free cash flow. What I'd rather see is management spend the divestment proceeds on a huge buyback. Hoover up the remainder of Woodfords shares as well as all the other insti's that would rather hold McDonalds and Coca-Cola due to public health concerns with tobacco. If, for example, they received £1.5 billion that would cancel 88 million shares at the current price of £17. If you times 88 million by the projected FY dividend of £2.06 that is £181 million saved a year from dividend payouts to shareholders alone. How's that for a dividend cut?! ;-) ATB
Side note: I'm holding here from low £20s, appreciate both positive/negative points of view as good to get an overview of what people are thinking. According to the 2018 annual report 88% of IMB holders are institutional so everyone here is just coming along for their crazy ride!
IMB yielding 11.3% based on £2.065 FY dividend. BATS yielding 7.5% based on £2.03 FY dividend. IMB has less leverage but arguably weaker brands in vaping and cigarettes. IMB does well with premium cigars but is selling that part of the business soon. Why not split 50/50 and average a 9% yield and cover both bases?
Well since the nest pension fund only had £40m of tobacco related shares left (note: no mention of percentage of that in Imperial Brands) I doubt that would have made much difference... unless perhaps it spooked a few other PIs or instis into selling. I'd say the major factor out of the two is Woodford, however tobacco is being punished globally and is not limited to this company alone.
I've noticed the percentage short has come down from over 10% in May to around 6-7% now. I also wonder how much the Woodford fallout is impacting Jupiter? We we able to hoover up a few of his ex-clients? We'll find out on 30th July I suppose. ATB
I've been following the tobacco companies for a while but only seriously got interested when the yield surpassed 7%, at that point the risk/reward profile became compelling enough for me to build a decent position. There was a similar thing a few years back when BP and Shell (during the BG buyout) were offering yields close to 10%. Everyone was worried about the future of oil then... now the market has shifted to focus on the future of tobacco. Never mind which one has more of an impact on our planet and economies. Personally I hold no grudges towards new holders that have been waiting on the sidelines to buy in at a discount. I did the same thing with Next Plc, refusing to buy shares for £80 but managing to get my price of £40 a few years later thanks to Brexit.