LK Hyman
12 Sep 2017
Re: Another good reason... Buy-back EPS ... Bill,"as witnessed by ULVR just the other day, raising 10yr-plus debt finance at WELL under 2%."Yes, I noticed that too, though I did just wonder whether the ULVR RNS wasn't ever so slightly misleading (not intentionally so, I hasten to add!) because it provided the detail of the nominal amount raised and the coupon thereon but didn't (I think) specify the price at which the bonds were actually sold. Nevertheless I'm sure you're right that the price of long term money is indeed dirt cheap at the moment for a company with a really fine long term record as a reliable supplier of debt.LKH on the flybridge
Bill1703
12 Sep 2017
Re: Another good reason... Buy-back EPS ... "Their pension deficit alone puts me off buying BT?.."I have added BT to my active 'watchlist'... an increasingly long list as that may be. Good work from Games... we'll make a true "value investor" of him yet!At least, we've know about the BT pension situation for a long time... and as I always say, it depends how much you want to worry about pension deficits. Humongous though this particular one is, admittedly...A big deficit is an undoubted drag on a company's cash flow, with the constant pressure from trustees and regulators to maintain adequate funding. But we are also, I believe, either at or at least close to the point of maximum pessimism with pension deficits... life expectancy has been rising steadily for a while, and bond yields have hit all-time lows - and stayed there, more or less.But life expectancy is now flattening off - and may well follow the US experience, where it is now trending down (though they do keep on shooting themselves). And the only way is up for bond yields, most likely... however gradual, and shallow, that trajectory may prove.Big deficits will always be a particular problem when pressures are mounting elsewhere for corporate cash flows... such as from rising interest rates, for a company with any significant level of ordinary debt. But any significant rise in interest rates, and hence bond yields, would also quickly sort out the pension deficit - or at least see it significantly reduced.In the meantime, yes, deficits will likely persist with rock-bottom bond yields... but any reasonably credit-worthy company can also raise fairly long term money at next to nothing - as witnessed by ULVR just the other day, raising 10yr-plus debt finance at WELL under 2%. So, its swings and roundabouts with pension deficits and debt piles... at least for many.
abeetle
12 Sep 2017
Re: Another good reason... Buy-back EPS ... Ah Ofcom's favourite whipping boy, the Italian job and the good old pension deficit.My favourite dog stock, only 2000 shares but seeing their paper value plummet from £10000 to £5800 has been a tad of an upset. A tad,no more, though - keep thinking long-term. Openreach is still under their aegis providing a national fibre roll-out, the little lack of oversight in Italy has been punished in spades and they still have Plusnet to show 'em t'sensible Tyke way o' doing things.Ah well, Mr Optimism me - I live in hope - they'll either do well or go bust or be taken over - it is what it is.
LK Hyman
11 Sep 2017
Re: Another good reason... Buy-back EPS ... Games,"anybody think BT at 283 looks like stoopid"Their pension deficit alone puts me off buying BT.LKH on the flybridge
gamesinvestor
09 Sep 2017
Re: Another good reason... Buy-back EPS ... "" there will inevitably be a tendency in practice to splash it on something stoopid."""Speaking of potential to be stoopid, anybody think BT at 283 looks like stoopid, or a screaming buy based on an overeaction on Italy -- I mean Italy ffs -- it probably represents less than a nats % of the biz.There is other stuff but none looks likely big enough to risk the divi innit !!Games - green button lined up for hovering over on Monday - 5.8% yield covered by free cash flow and 1.7X by profits -- there's money to be made in those copper wires - es possible?
LK Hyman
09 Sep 2017
Re: Another good reason... Buy-back EPS ... Bill,"as per my previous post."Yes, sorry, m8. I should have at least given you a credit for that!LKH etc
LK Hyman
09 Sep 2017
Re: Another good reason... Buy-back EPS ... Games,"Oh that's a big mistake in my view."Oh I agree, m8 ... don't get me wrong; I wasn't ADVOCATING "anything" rather than "nothing", merely trying to point out (obviously poorly) that, in a world where excess cash sits on the balance sheet, there will inevitably be a tendency in practice to splash it on something stoopid.So, best to avoid that temptation by doing summat reasonably sensible with the excess. A buy back meets that criterion in Diageo's case, my humble, given that Ivan has demonstrated his ability to do something stoopid on the M&A front on several recent (and not so recent) occasions. It is YEARS since he had his first brainfart ... over Chalone wines in California ... which at least had the merit of being less egregiously overexpensive than his most recent brainfart over the George Clooney, Randy Gerbil and Mike Milkmaid thingy.[link] on the flybridge like a dog with a bone
gamesinvestor
09 Sep 2017
Re: Another good reason... Buy-back EPS ... ""anything" tends to trump "nothing" "Oh that's a big mistake in my view.Warren Buffet didn't get rich by throwing his money on things that destroy value or even represent poor value (OK yes he makes mistakes, but obviously these are few and these are clearly not intentional).His investment style is what do they say -- "" Bordering on Sloth""Games -- Comfortable with 23% cash at the mo -- easy to find value destroyers (had my share), much harder to find things that don't deplete that 23%
Bill1703
09 Sep 2017
Re: Another good reason... Buy-back EPS ... "... I suspect it's not a very profitable biznay for the merchant banker concerned. Any emit can punch a "buy" button..."Exactly, LKH, and as per my previous post.Everyone ... whether Joe Small-Punter, Billy Big-Fund or, indeed, Diageo plc ... pays commission at some sort of level when they buy shares in the market. And there is every chance that, with this arrangement, DGE will end up paying less comm overall than if they just go in and buy tranches of shares themselves, periodically.Particularly if the business went out to competitive tender... back in the day, companies would just use their nominated broker for such an operation, but not always these days. Not sure whether Morgan Stanley are formal broker to DGE? Someone will tell me...Any half-decent market maker with any kind of market presence should be able to execute this programme... though some would doubtless make a better fist of it than others - not only in securing the best prices for their client, but in managing the risk on their trading book.
LK Hyman
09 Sep 2017
Re: Another good reason... Buy-back EPS ... Tomhawbauck,"paying Merchant Bankers to do so is double folly."Once they've decided to have a buy back they have to get a third party to execute it, if only to avoid the accusation that they might be timing the individual trades on the basis of inside information if they did it themselves, even using some junior intern to do it.Whatever one thinks of the merits or demerits of buy backs I suspect that it's not a very profitable biznay for the merchant banker concerned. Any eejit can punch a "buy" button. I wonder if there is any incentive involved whereby the merchant banker is paid a higher or lower fee if his actual average cost over the buy back period is lower or higher, as the case may be, than the arithmetic average of the share price over the period? Probably not, though there is likely to be some sort of league table as regards who is "good" at timing and who isn't. LKH on the flybridge
Bill1703
09 Sep 2017
Re: Another good reason... Buy-back EPS ... "... 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..."It is definitely one possibility, LKH... but it is in the end a decision made by people, and it could be merely further proof that people are naturally bad investors, too often... they buy high, when the going is good, and sell low, when it feels like the going never will be good again.But you raise here, indirectly, an important point... and one often overlooked IMHO. A company buying back its stock is not like you or I buying their shares... it is on the other side of the equation. If we buy shares, we are exposed ever after to the vagaries of the market as to the prevailing "value" of that investment, at any one time. But not so with a buy-back... those shares are effectively removed for the market and its vagaries, you have a fixed, transparent price for the transaction, and you can calculate the economic impact with a high degree of accuracy.People then say, if the SP subsequently goes down, they could have bought them back cheaper ... true, but this is merely an opportunity cost, it does not affect the (very transparent) economics of the original transaction. And opportunity costs abound in business, all the time... you buy a biz for £100m, it could be that if you had waited a year or two, you could have bought it for £80m, or even £60m. But it doesn't affect the transaction, nor any direct analysis of whether it's a good deal or not...In the same way, if shares are "expensive" for us to buy (e.g. Historically high P/E), they are "cheap" for the company in terms of cost of equity. It is why acquisitive companies with high P/Es find to easier to grow via acquisition by using their paper, financing deals with equity rather than cash and/or debt. It is also why companies should be issuing shares when their stock is hitting all time highs, not the reverse, as in retiring them via buy-backs. I am not suggesting Ivan should be issuing shares - if he doesn't need the finance. But it does question the reverse... as I said, even if DGE falls going forward (as we think it might well), there is no "loss" on the current buy-back, merely an opportunity cost. But it does mean that the return on this buy-back will be less (by quite a lot) than it would've been, say, 2 years ago, back down at £17 a share and a P/E more like 19x than 24/25x. And you can calculate this difference with a fair degree of precision (and maybe I will, if I find myself sufficiently bored later on....)
tomhawbuck
09 Sep 2017
Re: Another good reason... Buy-back EPS ... I entirely agree with Games, buying shares back at this price level is folly and paying Merchant Bankers to do so is double folly. The best choice is to do nothing. The second best choice is to pay an increased dividend. If Diageo can't think of what to do with the money, then surely they should hire some people who can or give it back to us. I can think of loads of things I could do with it. The well paid geezers at Diageo should sit down and ask themselves 'whose money is it'. Fat chance of that happening.
Bill1703
09 Sep 2017
Re: Another good reason... Buy-back EPS ... "... if the average price of the buy back is higher than the average share price in whatever period AFTER the buyback... the buyback was the wrong thing to do..."No, cannot agree LKH. Games is right... over any reasonable period, there are a myriad of influences on a SP, and many of them outwith management control. What really matters is whether the SP is higher or lower post buy back than it otherwise would've been, all else equal - but as Games alludes to, this is a very difficult assessment to make, arguably impossible. I have seen some studies make a reasonable stab at it, but it'll never be definitive ... all else is never equal, and never will be!I do not agree with Games, that this buyback is a "waste" of shareholders money... but maybe this is just semantics? As per my earlier analysis, it looks set to be slightly earnings enhancing, and probably marginally accretive to "value"... but yes, 'marginal' is the thing here. Is that a waste? Not compared to a big and bad M&A deal, nothing destroys value so much, and so quickly... but of course, it is all relative.So I have some sympathy with Games' view, maybe doing nothing sometimes is the best option? Though I agree with you, this ain't easy in practice... and doing nothing quickly sees shareholders clamour for the capital to be returned to them, so that THEY can put it to work. Spending money - whether on M&A, higher R&D spend, whatever - just because you have it, and not because you can see a decent return, is never a good thing, and will also just lead to shareholders wanting their money back, as above.I should read Mr Authers' article... if he arguing that stocks underperform subsequently as a RESULT of buybacks then I take leave to challenge this. If he is merely observing (hopefully with proper analysis?) that stocks underperform after buybacks, then I would suggest this is much to do with the fact that (far too) many companies tend to buy at the top, just as far too many investors do - as per my previous post. I think there is every chance that DGE will underperform from here over, say, a reasonable medium term period... but I do NOT think this will be anything to do with the current buyback. Whatsoever!!Personally, I think there is a strong case for companies - where surplus capital is clearly identified - to "return" it via buybacks where the SP (or more pertinently, the valuation) is appropriately low, and via dividends (special or merely higher ordinary) when the valuation is high. But I am well aware that, too often, they do the reverse... Next being one notable example in recent times - and they are supposedly masters of capital allocation!
LK Hyman
09 Sep 2017
Re: Another good reason... Buy-back EPS ... Games,"so many factors could effect [sic, recte affect] the share price"True enough, m8! However, whatever them factors are, it don't alter the fact that, if the average price of the share buy back is higher than the average share price in whatever period AFTER the buyback that you choose, the buy back was the wrong thing to do and they should of done summat else wiv the money.Anyhoo, I'm not sure that it's possible, in practice, to do "Nothing" with the surplus capital. Whenever money is burning a hole in one's pocket "anything" tends to trump "nothing" .... as I am finding out mesen with the pitifully small pile of klebbies that is sat in cash in my bank account while I rack what passes for my brain for summat to do with it. Apart from anything else the workforce might start agitating for the money to be paid to them in extra wages ... which would never do.Thus far I have managed to keep it in cash but I have a nasty feeling that, in the next week or so, I shall buy some share or shares, notwithstanding the fairly demanding ratios and the general world clusterfuck, if only to put mesen in a position where I can subsequently get back to my preferred "buy and hold" strategy.LKH on the flybridge
gamesinvestor
09 Sep 2017
Re: Another good reason... Buy-back EPS ... "Only then will we know whether it was a good idea or not."LK - so many factors could effect the share price, that whatever the price of Diageo's shares are in 12 months time it would be difficult, No Impossible, to correlate it in any meaningful form to the buy back of shares over the next couple of months.Games -- Buy Backs? -- tsshhhhh!!
