gamesinvestor
09 Sep 2017
Re: Another good reason... Buy-back EPS ... " So what would you prefer Ivan and Kathryn to do with what is arguably surplus capital? "NothingGames - until they find something of real value to invest in.
LK Hyman
09 Sep 2017
Re: Another good reason... Buy-back EPS ... Games,"it's a waste of shareholders funds - however way you calculate it or size it up."I wonder if you're right? At a certain level of course you ARE right. Several posters have said that, at the current share price the shares are a sell, because the various ratios are unusually demanding so, if one believes that, in a few months the shares will be priced more cheaply, it seems crazy to buy 'em back now ffs.At the same time a decent company needs some ruling guidelines as regards its balance sheet and what it does with the funds available to it in general. So what would you prefer Ivan and Kathryn to do with what is arguably surplus capital? A special divi ... clearly stated to be special because there's insufficient headroom vis a vis the avowed "normal" divi/eps policy? Probably not, if only because of the adverse tax consequences for some shareholders?Whack up the marketing spend behind the existing brand portfolio? I dunno ... Will the margin on the additional hooch sold outweigh that spend? Possibly not. Diageo already pours a lot of money into marketing promotion. One does not want to pile Pelion upon Ossa merely for the sake of "doing something".Whack up the R&D budget? It seems somehow improbable that throwing several hundred million quid at a bunch of white-coated scientists with pipettes will produce a genuinely new and differentiated Baileys or (God help us!) Casamigos.Build some new distilleries? I don't have the impression that supply, given the level of worldwide demand, is particularly constrained given their present number of distilleries.Do some MORE M&A? Geddahdaheeah!Consequently, if one eliminates all the alternatives (and I'm sure I've forgotten some) one is left with the possibility that the biz is throwing off so much cash that, despite all the evidence to the contrary, the equity is indeed too cheap, which makes a buyback a sensible use of the funds.John Authers tells us that companies that do buybacks tend to underperform. It'll be interesting to see what the average price for the buybacks is ex post facto and compare that with the share price in, say, the year following the buyback. Only then will we know whether it was a good idea or not. I maintain my view that the shares are currently overpriced but will happily put my hand up and say I was wrong if the evidence is there when the buyback is complete.LKH on the flybridge
gamesinvestor
08 Sep 2017
Re: Another good reason... Buy-back EPS ... irrespective of the consideration or otherwise w.r.t EPS and the impact or not on remuneration, it still makes no sense to buy the shares back at these inflated levels because it ain't gonna last so Ipso facto -- it's a waste of shareholders funds - however way you calculate it or size it up.Games
Bill1703
08 Sep 2017
Re: Another good reason... Buy-back EPS ... "You're right... and EPS has little to do with it..."Many thanks, LKH ... I knew I could rely on you for the hard yards. And QED, I believe...And this overall profile, across both annual incentive schemes and LTIPs, etc, chimes with those of most other big (and quite a few small) companies ... where, in essence, if there is anything at all that could be positively tweaked by a buy-back, it is a pretty minor element - effectively de minimus, I would say. It really should put to bed all those conspiracy theories... but no, I'm sure they'll be trotted out still, from various sides. I think it's all part of the masochistic, 'siege mentality' of your average PI... for some reason, it's preferable to portray the whole game as being rigged against them!"It seems a fairly sensible bit of balance sheet management..."Yes, probably true ... no more, no less. And particularly now that I've proved (to my satisfaction, if nobody else's) that this buy-back will likely be earnings enhancing - albeit marginally... of course, it is not just about EPS enhancement, it is possible to enhance earnings but still "destroy value", if the benefit is more than offset by the cost of increased risk to the equity (particularly if your mates Miller and Modigliani get involved ...). I have seen buy-backs that "fail" on this count.But given DGE's still-robust balance sheet post-event, and the high ongoing free cash flows - which will see net debt come down again soon enough, all else equal - then I am prepared to say, with some confidence... "this buy-back will NOT destroy value!!" Even if it's relatively neutral on this front.But I still think the answer to their divi conundrum should have been... change the policy! A business with their defensive and relatively predictable operational and cash flow profile should be able to sustain dividend cover NOTABLY lower than the current target range. IMO... whether H or not....
LK Hyman
08 Sep 2017
Re: Another good reason... Buy-back EPS ... Bill,"I am sure that DGE has a complex, multi-faceted remuneration structure these days"You're right .... and EPS has little to do with it. Reading the relevant section of the last Annual Report (which requires a wet towel to be wrapped around the head) the Annual incentive plan has four elements:Operating profit (% growth) has a 25% weightingNet sales (% growth) has a 25% weightingAverage working capital as a proportion of net sales has a 30% weighting andIndividual business objectives has a 20% weightingThe foregoing applies to Ivan and the bean counter bird.I rather lost interest when it came to the criteria for their LTIP rewards, though did note that EPS performance was only one of four equally rated criteria.Consequently I think we can take it that it's unlikely that the motivation for a buyback will be because it affects the two hotshots' pay packets.The reason for the buyback is actually quite simple. They couldn't put the divi up by more than they did because of the policy that the ratio of eps to divi should be between 1.8 and 2.2 to 1. However they also have a policy that targets net debt to ebitda of between 2.5 and 3 to 1. Since the actual was 2 to 1 at the year end they felt it was sensible to gear it up a bit via the buyback, thereby getting nearer to the target.It seems a fairly sensible bit of balance sheet management.LKH on the flybridge
Bill1703
08 Sep 2017
Re: Another good reason... Buy-back EPS impact "It's linked to management remuneration criteria - no other reason at these high levels."Ah, you can't keep a good conspiracy theory down! Like any good tabloid... print the rumour!But hoary old PI myths aside... I strongly suspect not, for two reasons.First, I haven't checked (and someone will doubtless correct me if I am wrong) but I am sure that DGE has a complex, multi-faceted remuneration structure these days - most of the elements of which will be effectively insensitive to what is a pretty small buy-back... most likely.Second, if EPS enhancement is the main "accusation" here - as has typically been the case historically - you can actually calculate the EPS impact here. And you know what... I have!!As I said, a fairly small buy-back... £1.5bn for a £65bn stock. Assuming the current (elevated) SP, cost of debt around 4%, the current tax rate (20-21%), etc, etc... the overall net impact on EPS is .... an enhancement of approx. 0.5%!! So positive, but pretty much negligible... less than you would expect for most equivalent buy-backs, but this just reflects the current high valuation.So, I disagree... simply because, there would be little point. An EPS impact of 0.5% is neither here nor there, would get lost against even small movements in FX or other items, and I doubt any of the top floor boys and girls would even notice it in their pay packet.No, if they wanted to "enhance" their management remuneration, there's is a much simpler, and more effective route... er, just pay themselves more! That's what most other boards do, nowadays...
gamesinvestor
08 Sep 2017
Re: Another good reason..... "why buy stock back at these elevated levels"It's linked to management remuneration criteria -- no other reason at these high levels.Games
Bill1703
08 Sep 2017
Re: Another good reason..... "A trained monkey can press a buy button, why do they need to pay an organisation probably £millions for the privilege..."Well, Games, it is fairly common practice for companies to delegate such a programme - it avoids any accusation of conflict of interest, insider knowledge, etc. Yes, MS will probably pocket millions... but we all pay commission for buying shares. My guess is they may get around 6-10bp for this, so perhaps £1-1.5m.... so yes, money for old rope to an extent, but as a % commission, it will probably be less than you or I often pay for our purchases. Just as a FYI... I don't want you feeling sorry for those paupers round at MS!!The bigger question is, why buy stock back at these elevated levels, and not when they were, say, back down at £17 just a couple of years back? There have been a few studies and articles recently (e.g. Jeremy Grantham at GMO) which have all reached the same conclusion - and hardly a new one... to wit, that people are intrinsically just bad investors.Most of the time, anyway ... and this goes for private investors and the professional guys,and for those running companies too. People buy shares when times are good, when everything feels buoyant, you feel things will just keep on going up... but of course, most often the market price already reflects this. And equally, they should be buying when the SP is depressed and under-valued... but things will just feel gloomy with no end in sight, so they are more likely to sell.So, we all know we should buy low and sell high... yet in practice, relatively few actually do, and more often do the opposite. It is why we have the current market polarisation, expensive stocks still going up, cheap stocks just getting cheaper... it is also why companies tend to launch into buy-backs at cyclical highs, and often just when they shouldn't.Running the numbers on this buy-back, I doubt it will actually destroy value for DGE holders... but it will likely be marginal, and certainly questionable.
abeetle
08 Sep 2017
Re: Another good reason..... The buyback isn't exactly news. When a company can't see exciting investment prospects - and they do seem to have run out of those at present! - then 'Shareholders demand returns on their investments in the form of dividends which is a cost of equity – so the business is essentially paying for the privilege of accessing funds it isn't using. Buying back some or all of the outstanding shares can be a simple way to pay off investors and reduce the overall cost of capital. For this reason, Walt Disney (DIS) reduced its number of outstanding shares in the market by buying back 73.8 million shares valued at $7.5 billion in 2016.'[link]
nimbo1
08 Sep 2017
Re: Woody apologises another stinker today - benchmark
nimbo1
08 Sep 2017
buyback Share buyback has begun. Unilever one has been working well (price increasing along with my divi per share), will be interested to see how it works here.
gamesinvestor
08 Sep 2017
Another good reason..... To get out of this company is this ......[link] illustrates the disdain this companies management has for the true value of shareholder funds. Not enough was it to squander $1Bn on a drinks label of dubious pedigree, but now they even hand out the buy back of the shares to a fee clutching organisation like Morgan Stanley with ""NON Discretionary"" powers to buy back shares at inflated prices, at will, and with no judgement set aside for whether this makes economic sense or not.A trained monkey can press a buy button, why do they need to pay an organisation probably $millions for the privilege.The corporate world has become a very expensive one and the waste is truly astonishing.Games
picstloup
07 Sep 2017
Re: Does it invest wisely? O/T RB / ULVR LKH "can't see Mead Johnson being another Durex (as it were). It sounds a bit more like another Casamigos."Hmm, not as I see it. No Clooney in sight, margins at 20% (slightly below RB's 24%, but $200m of expected synergies will make up the difference), expands RB's exposure to emerging markets from a third to 40%.It has dropped a bit in the last month, but for a long term holder like me it's hardly a blip on the upward graph. I've had some of these since it was Reckitt and Colman in the 80s, I bought my main stake at £6 at the millennium, topped up modestly at £33.33 in 2011. ([link] and (homeopathically) last year at £72. I would say £71 was an excellent entry point, and in a year, when new marketing talent is in place, MJ is absorbed and upping fcf again, debt is back down (mustard sales have already reduced it, with other non core sales coming up) it will look cheap. But l am talking my own book, as this is my largest holding (still outperforming my ULVRs over 5 years and more, but no longer over 1 and 3).
gamesinvestor
06 Sep 2017
Woody apologises [link] it looks like he's sorry but not really (I'm only kidding) at the same time.He still spouts that his strategy is/was right ......Er so if he had an his time again, he would have bought ? :--The AA; Provident, Rolls Royce, Centrica, Circassia, North West Biotherapeutics, Centrica, Allied Minds, etc etc etc.Games
LK Hyman
06 Sep 2017
Re: But I know we'll meanrevert ....... Games,"The hint is that it'll be in the summer likely"Talkin' of the summer, m8, did you see that Woody has put out a little video called "A summer in perspective"? I haven't actually watched it yet but I was amused to see that it's prefaced with a pic of Woodentop apparently sporting a ginger Mohican. Perhaps he thinks that people won't recognise him in Oxford and berate him for his recent serial munters. [link] on the flybridge if summer comes, can winter be far behind?
