Bill1703
24 Feb 2017
Re: Why did .... "They started the year with £273M in cash and ended it with £53M... They effectively depleted the cash balance to cover the dividend which was not covered by free cash flow... the key question is why would they do something which on the face of it looks less than prudent."Games - I think you have to look elsewhere, possibly at working capital, or current investments? And then there are the share buy-backs to consider.At the current SP, I have free cash flow yields of 7.5% and c.10% for the past two years, so (very broadly) covering a dividend of c.4% two times over. Which corroborates the management view of it being (at least to date) a strong free cash flow generator.So in essence, I think your numbers are leading to an erroneous conclusion - that the dividends are not covered by free cash flow. But I'd have to dig around to fully explain the movements - which I will do when I get the chance!
SumTingsWong
24 Feb 2017
Impressed Next Plc is implementing a new Digital Asset Management (DAM) system to enhance its ability to use and manage its growing volume of digital assets, such as photos and videos. This will help the retailer to bring its products to life on its e-commerce website (next.co.uk) and the Next Directory more efficiently, and to create a more immersive experience for customers. Retailer Next Plc selected WoodWing’s digital asset management system, Elvis DAM, to create a more immersive experience for customers. Next Plc has selected multi-channel publishing firm Evolved Media Solutions (EMS) to the task of building and implementing the new platform which will be created using WoodWing’s digital asset management system, Elvis DAM, tailored to Next’s own unique......========== ========== ========== ========== ========== ==I must say, I am intrigued by this innovation and it does somewhat confirm they are realising the digital age is well and truly upon retailers. The novel factor alone would want to make me delve its capability, so one would become a captive audience, we all know what happens then, its a bit like popping to the newly fitted out grocers for a newspaper and coming back with half the shop!I have today purchased Next, so whilst I maybe a bit biased here, it has a trailing P/E of just over 8x and a recent in-depth analysis of its fundamentals by a well respected outfit did suggest fair value at circa 5200p per share, of course I would be happy with 4200p near term.Notwithstanding the above, I also note Woodford added substantially to his portfolio with NXT too.All NXT needs now is a bit of love and tenderness and of course the generous dividends do help, I feel if the market continues to unfairly penalise NXT then I would not be surprised if we do not become a target, hopefully not as it would be another PLC gone from UK hands.Mr Wong
gamesinvestor
24 Feb 2017
Re: Why did .... " For example how much cash did they start the year with? Do they add exceptionals, like defined benefit pension plan rebalancing which appears below net profits (cheeky/fraud). I do not think they can pay dividends out of thin air,"Akis in the this case the pension is not an aspect, there were no particular alarming exceptional items, which would not matter, because that would only make this example worse.They started the year with £273M in cash and ended it with £53M.They effectively depleted the cash balance to cover the dividend which was not covered by free cash flow.Games - the key question is why would they do something which on the face of it looks less than prudent.
Akis1999
24 Feb 2017
Re: Why did .... We have to look deeper into the accounts. I was looking recently at another company (Bovis) and at their cashflow statement, For example how much cash did they start the year with? Do they add exceptionals, like defined benefit pension plan rebalancing which appears below net profits (cheeky/fraud). I do not think they can pay dividends out of thin air, it must be there somewhere and in the cash flow it has to be covered completely by cash, if not by "profits".
gamesinvestor
24 Feb 2017
Why did .... Next deplete it's cash so much last year?This has probably been discussed before, so apologise if going over old ground, but:-Next had total cash from operations of £608M in 2016From this deduct capital expenditures net of £139MLeaving £469MFrom this the company paid dividends of £568MWith other listed items, the net change in cash was negative - (£220M)Would it not have been more rational to pay an affordable dividend of say 40-50% of the £469M?Is this kind of activity designed to prop up the share price artificially? -- If so, it hasn't worked of course.Games
Eadwig
23 Feb 2017
Re: Buybacks vs Special Dividends Bill, "And there is a 3rd advantage, and an important one IMHO. Special dividends, over which as you say you have no choice, could crystallise big tax liabilities - particularly with the recent changes to dividend tax law - which would significantly reduce the value to at least some shareholders. It is one major reason why some shareholders prefer buy-backs over specials."[Really my last comment.] This has just changed though. Previously a 'return of capital to shareholders' attracted no income tax and was described as such rather than as a special dividend. I don't tend to pay tax myself these days, due to special circumstances, but am flinching at the new laws covering dividends when doing my pensioner father's accounts. Especially as his whole allowance is taken up by the single Persimmon payment that was once a 'return of capital'.
Bill1703
22 Feb 2017
Re: Buybacks vs Special Dividends "I think one of the problems with buy-backs has been where management have used them to manipulate EPS higher when this has been one of the metrics on which incentive payments have been based. To my mind the two are not compatible."OM - agreed. And it is a major reason why some have taken a dim view of ALL buy-backs, which is wrong and very much a baby-out-with-bath-water situation IMHO." ... a buy-back has two advantages over a special dividend: 1) it reduces the ongoing cost of paying the dividend ... so making it more sustainable in the event of any adverse trading conditions; 2) each shareholder gets to choose whether to participate in the buy-back, whereas they have no choice other than to receive a special dividend."Agreed on (1) - a key purpose is to reduce the equity base (and hence, in many cases, WACC). Of course, companies CAN accompany a special divi with a cut in the ordinary (a dividend is always a choice, never a right) - but this can confuse and upset some. Which is why you see some large specials accompanied by commensurate share consolidations (most recently - National Grid) - it effectively does the same thing, but in a more covert way!On (2), in most on-market buy-backs, all shareholders do NOT tend to get the choice - only with large-scale (and more expensive) buy-back operations which are opened up to all. But of course, any shareholder can sell proportionally in the market, at any time...And there is a 3rd advantage, and an important one IMHO. Special dividends, over which as you say you have no choice, could crystallise big tax liabilities - particularly with the recent changes to dividend tax law - which would significantly reduce the value to at least some shareholders. It is one major reason why some shareholders prefer buy-backs over specials.
onewayticket
22 Feb 2017
Re: Buybacks vs Special Dividends Far better with the Special Dividend in my view as it helps to draw a line in the sand with the share price. As the share price falls then the yield what with a dividend and special dividend becomes appealing. Furthermore some will buy in before and just to hit the ex dividend dates particularly if its about 8 to 10% levels. It would take you about 4 years to get that in an ISA.Secondly with your dividend and special dividend monies you are free yourself to elect to buy back yourself any additional shares you like through dividend reinvestment.Own due diligence.
Omaha man
22 Feb 2017
Re: Buybacks vs Special Dividends Eadwig - I would absolutely agree with your points that it is necessary to have the right management for different stages in a company's development and that low growth or stagnation does not imply a drawn out death. Unfortunately I think the market generally does take that view on the latter point.I think one of the problems with buy-backs has been where management have used them to manipulate EPS higher when this has been one of the metrics on which incentive payments have been based. To my mind the two are not compatible.The only other comment I would make is that a buy-back has two advantages over a special dividend: 1) it reduces the ongoing cost of paying the dividend (fewer shares in issue) so making it more sustainable in the event of any adverse trading conditions; 2) each shareholder gets to choose whether to participate in the buy-back, whereas they have no choice other than to receive a special dividend.
Eadwig
22 Feb 2017
Re: Buy backs Bill, "It makes little difference whether repurchased shares are cancelled or held in treasury - they don't count as shares in issue. "I take your point, but I think it makes a big difference to sentiment. Shares in treasury immediately create questions and speculation - like 'what acquisition are they saving up to fund?'When shares are cancelled, you don't hear anyone discussing when they will be re-issued.Personally, I'd always prefer to see the shares cancelled, otherwise what's the point of taking the risk that you may be buying too high? If you see what I mean.As you say, new shares can always be issued later to fund some new project or other. (Treasury shares can also be cancelled later, I suppose). Treasury shares can be used for employee incentive schemes too, so can save on costs of issuing more shares potentially. You don't often see the specific reason for placing in treasury as opposed to cancelling, laid out when buybacks are announced though.Anyway, last from me on the subject. Its endless and I'm pressed for time at the moment.
Akis1999
21 Feb 2017
Re: Another illustration re Buy Backs gamesinvestor ,is there a way to communicate privately via email ?
Bill1703
21 Feb 2017
Re: Buybacks vs Special Dividends "If a company has reached its logical limit... then job well done, and lets have dividends at the absolute maximum practical. Special dividends if necessary.... Buying back one's own shares is just another result of casting around looking for something to spend the money on, isn't it? And just as likely to destroy value as an acquisition in my experience."This is the first of the common misconceptions on buy-backs IMHO. When you buy-back shares at a certain price, you KNOW the "return" you are making - it can be quantified and compared and benchmarked against all alternative available uses of cash (as I believe all good companies should be doing anyway). When you make an acquisition, or even invest in the existing business, you are usually merely guessing at the return, however 'educated' such a guess may be - and often, such returns prove illusory (sometimes seriously so).Sure, if your SP goes down (for any reason) after a buy-back, you can say it could have bought back at a better price - but this is merely an opportunity cost, not a forecast return which fails to materialise. Equally, the SP may go up - again, for any number of reasons - and over time, shares are (far) more likely to go up than down on average. In any event, many companies average-out this issue over time by ongoing programmes of small repurchases. "That's the single major problem with buybacks for me, ultimately. How on earth do you tell if they worked or not? Even when they appear to be a major failure, management can always argue the share price would have dropped much more without the buyback."And now you highlight the second common misconception - but also the key reason why it probably exists. It is wrong to say, as many do, that a buy-back only "works" if a SP goes up (and stays up) - what matters is whether the SP is higher (again, over time) than it otherwise would have been, all else equal. And again, IMHO... but the exact same is true of any other 'investment'. There are so many influences which can send shares up or down, and many of them outwith the control of management. But it is, as you say, pretty hard to quantify this with any precision! There are ways of attempting it over a period (eg. considering EPS and/or DPS, both post-buy-backs and what they would have been without them, all else equal of course, and then looking at market valuations, P/E, div yield, etc), but it's hardly an exact science. "So, perhaps if not a complete 'admission of failure'... then maybe at best a 'failure of imagination' to come up with a more creative use of the surplus cash, that can actually be measured to gauge success or failure. "Yes, perhaps there is an argument here. But the key for me is the reality, which I only came to accept eventually and reluctantly, that a buy-back and a special dividend of equivalent size are economically identical for a company's finances. Once you accept this (if you ever do), then you tend to come to look at buy-backs in a different light.They are NOT identical in terms of an individual shareholder's finances, largely on tax grounds, as previously described - but that is maybe another issue!
Bill1703
21 Feb 2017
Re: Buy backs "I could name many buybacks where the shares are simply transferred to treasury ... Do you change your view when that's the case, as with the HSBC buyback I used as a successful example?"It makes little difference whether repurchased shares are cancelled or held in treasury - they don't count as shares in issue. Shares held in treasury can then be subsequently reissued (eg. to fund acquisitions, etc) - but then, new shares can usually be issued in such an event.
Eadwig
21 Feb 2017
Re: Buy backs Afrosia, "Shareholders are richer with option 2, so shares should be bought back and cancelled. "Just to make clear first, my comments are not about Next specifically, who at least have been a little creative with their buyback (only below a defined share price).However, re: your quote above. I could name many buybacks where the shares are simply transferred to treasury ... Do you change your view when that's the case, as with the HSBC buyback I used as a successful example? I'm not expecting you to answer, necessarily, unless you feel the urge. Just highlighting what a minefield it can be to evaluate buybacks. William Hill was a good example of a buyback where all shares were put in treasury. I think it started with the price around @370p, and finished with the price well under @300p (@262p as I type).As a shareholder, I was personally baffled by the logic when it was announced, during the buyback and still am (I assume its finished). I managed to trade out of them with a profit, mainly due to an attempt to take them over in the middle of it all, during which time the buyback was suspended (with no announcement of the same, by the way, just a sudden end to daily RNSs of them buying the same value of stock each and every day no matter what the share price was).This done at a time when the company was in desperate need of spending cash on its online business in order to successfully compete, by the way, which it has failed to do, and when it knew it was sailing into headwinds of higher taxes and limits placed on its most profitable operations.Eadwig, still baffled.
Eadwig
21 Feb 2017
Re: Buybacks vs Special Dividends Omaha Man,I accept what you say, except that I did give the example of a company failing to achieve returns (not growth) of others in the same sector. I specifically didn't include using extra cash on hand to make acquisitions in an attempt to buy growth. I agree that in such circumstances, bad decisions tend to be made by boards casting around for some way to spend extra cash - they will inevitably find a chance.I don't necessarily subscribe to the theory that in capitalism if a company (or economy) isn't growing, then it is moving into stagnation and doomed to a slow, drawn out death. Although many would argue that. I think its a question of having the right management for the right circumstances (continued growth, or maintaining the efficiency of a company near full potential).If a company has reached its logical limit in its sector and for its model, then job well done, and lets have dividends at the absolute maximum practical. Special dividends if necessary to get rid of a growing pool of cash.Buying back one's own shares is just another result of casting around looking for something to spend the money on, isn't it? And just as likely to destroy value as an acquisition in my experience.They're not becoming any less popular though, are they? Another $1Bn announced by HSBC today - one of the few that appears to have worked for shareholders in recent times, although the previous one was $2Bn, coincided with the boost for USD earners in the FTSE and we now know happened during a year when profits fell by >60%.That's the single major problem with buybacks for me, ultimately. How on earth do you tell if they worked or not? Even when they appear to be a major failure, management can always argue the share price would have dropped much more without the buyback.So, perhaps if not a complete 'admission of failure', as you're taking issue with that, then maybe at best a 'failure of imagination' to come up with a more creative use of the surplus cash, that can actually be measured to gauge success or failure. Not that I'm so hot under the collar about the issue that I refuse to consider re-buying into HSBC in order to perhaps take advantage of a similar success this time around ...
