The tobaccos again.

[Dod101]

I may be able to post my 2019 review later today but although I am well up overall in terms of value, I have been held back to a very serious extent by the poor performances from the likes of Shell, HSBC and above all Imperial Brands. I can understand the reason for Shell and HSBC as both have frozen dividends and show no sign of changing this for now, but Imperial must either be about to cut its dividend or it is a screaming buy. A drop in the share price of about 21% over the year has left its yield at around 10% and yet its fellow stable mate, BAT has seen a rise in its share price of around 29% and the current yield is now around an understandable 6%, still attractive. The same should be happening with Imperial and why not? The market usually knows more than me so maybe there is a message there.

Both are quite heavily indebted and BAT more exposed to that heavily regulated market, the US so I simply cannot understand it. The SP of Imperial has risen a little in the recent post Boris rally but not by very much.

Any comments would be much appreciated. I am not inclined to make any changes for now n my tobacco holdings.

Dod

[TUK020]

Very good question. One that I have been puzzling over as well.

[EssDeeAitch]

Simple reason for their fall. I bought them in preference to BAT.

I should post my buys to save others from doing so . Happy new year

[77ss]

....

Both are quite heavily indebted and BAT more exposed to that heavily regulated market, the US so I simply cannot understand it. The SP of Imperial has risen a little in the recent post Boris rally but not by very much.

Any comments would be much appreciated. I am not inclined to make any changes for now n my tobacco holdings.

Dod

I'm hanging in there. BATS has shown a decent recovery in 2019, whereas IMB continued to fall. OTOH BATS fell substantially more in 2018 so perhaps was more likely to show a recovery. Over the 2 years the two are not that different -36% for BATS and -41% for IMB.

I am not expecting continuing 10% rises in IMB's dividend - they are quite up front about this:

https://www.investegate.co.uk/imperial- ... 00057152E/

Personally, I am keeping an eye on IMB. If it starts to show signs of recovery, I may top-up.

[Dod101]

Thanks EDA. It happens to me as well!

77ss. Imps is showing signs of recovery, just. We are not going to get any more 10% rises in the Imp's dividend I know that but we have never had that from BAT and yet their dividend yield is only around 6% against 10% for Imperial today. The market usually reads the future not the past and investors are buying BAT in preference to Imps which is illogical unless there is something else we are not recognising.

If I were to put money into tobacco today it would have to be into Imps surely.

Dod

[monabri]

Thanks EDA. It happens to me as well!

77ss. Imps is showing signs of recovery, just. We are not going to get any more 10% rises in the Imp's dividend I know that but we have never had that from BAT and yet their dividend yield is only around 6% against 10% for Imperial today. The market usually reads the future not the past and investors are buying BAT in preference to Imps which is illogical unless there is something else we are not recognising.

If I were to put money into tobacco today it would have to be into Imps surely.

Dod

Based on Gross & Operating margins one can see a significant difference in BATS v IMPs. (the numbers have been pretty consistent at these levels over the last 5 years)



One has to ask how two companies that are in the same business of tobacco can have such massively different margins?

I also remarked on BATS v IMPS here viewtopic.php?p=273345#p273345

I seem to remember that one reason why IMPs share price was high was due to talk of it being snapped up by someone like Japan Tobacco Inc (JTI) ..approx 3 years ago? (I'd speculate - watch this space "Imperial Japan Tobacco" has a nice ring about it - ).

Data source & Margins

IMPS
http://financials.morningstar.com/ratio ... t=xlon:imb

BATS
http://financials.morningstar.com/ratio ... =xlon:bats

A note on "margins"
https://www.accountingtools.com/article ... argin.html

[Dod101]

You may well have the answer monabri, thank you. Bearing in mind that Imps is getting a new CEO in due course (and Chairman?) maybe the fear is that the dividend is indeed under threat. From the numbers you have produced, there is not much doubt that BAT is the better business.

I will think on it but probably do nothing.

Dod

[onslow]

I thought the historical underperformance in margins for Imperial was to do with them having their own logistics/distribution arm - its a low margin part of their business, drags down the overall margin. Obviously they still feel the need to hang on to it though.

[monabri]

Article from 2015 discussing a possible takeover..

https://www.reuters.com/article/us-impe ... XW20151126

"VALUATION - Then there’s the price. Any deal to buy Imperial could top $67 billion, assuming a 30 percent takeover premium, plus $17.5 billion in debt. Imperial shares are up 27 percent this year to around 36 pounds..."

And, at the time "($1 = 0.6629 pounds)"

Nowadays, the market cap is £17.7Bn or $23.6Bn. With the same takeover premium, a relative snip at $30.7Bn with debt at £13.7bn/$18.3bn.

"Roll Up, Roll Up, sale now on - 50% off" (see what I did there )


(of course, one could have just factored the share price in 2015 v today but I wanted to include the exchange rate /cable).



Do we take any comfort in the recent PDMR buys - especially by Mr Tant (CFO) - salary £1.4m p.a. and noting that Mrs Cooper is also spending (especially as she is "on the way out") ?

[77ss]

......
Do we take any comfort in the recent PDMR buys - especially by Mr Tant (CFO) - salary £1.4m p.a. and noting that Mrs Cooper is also spending (especially as she is "on the way out") ?

I too have been keeping an eye on these. The ones that interest me most seem to be missing from your table - perhaps there is something I don't grasp about regulatory announcements?:

[/quote]

[NeilW]

"Going back to Imperial Brands, due to past acquisitions, its earnings are reduced by approx £1 billion each year as a result of this amortisation. Without this non-cash amortisation expense, Imperial’s profits would be close to 70% higher!

That is why in the case of Imperial Brands, free cash flow is more important.

Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. Essentially, it is the the amount of cash generated by the company which is available to pay dividends, debt reduction, share buy backs, or acquisitions.

I personally want to own companies who produce sufficient free cash flow to fund the dividend. I also want to see free cash flow going year after year.

Looking at Imperial Brands, it has a Free Cash Flow per share figure of close to 300p. Its cash flow has been consistently high and far in excess of the dividend over recent history. This suggests that the company is generating more than enough cash to afford those increasing dividend payments.

So whilst dividends look unsustainable when looking at the earnings figure, Imperial produces more that enough free cash flow to cover and grow the dividend"

http://moneygrower.co.uk/understand-accounting-to-be-a-better-investor-earnings-vs-free-cash-flow/

Once again Profit is a matter of opinion, Cash is a matter of fact. IMB has bought a lot of turkeys in the past, and the share price reflects that. However the balance sheet doesn't yet because of the amortisation of goodwill rules - even though the debt/equity used to pay for the assets has been written down.

It looks to me as though IMB has been caught in a perfect storm of investors shunning the stock. Barring Provident Financial levels of stupidity (like the company saying it is stopping selling its cash cows for ethical reasons), I can't see why this wouldn't pay back an investment in the share fully over the next ten years.

[monabri]

The free cash flow per share is a very useful metric for HYPers to keep an eye on - especially the trend in FCFps relative to the dividend.

The info is usefully presented in nice tables in MorningStar. I did tabulate figures for quite a few HYP shares but that was two . years . ago ( ) in Jan 2018. Tempus Fugit!

viewtopic.php?p=112051#p112051


Do you happen to know when the amortisation will taper off - they can't continually write down an asset forever?

[NeilW]

Do you happen to know when the amortisation will taper off - they can't continually write down an asset forever?

However the applicable Accounting standards say otherwise

"Goodwill arising on acquisitions, however, ie, purchased goodwill, is recognised and capitalised in accordance with IFRS 3 Business Combinations. In simple terms, purchased goodwill is measured as the difference between the amount of consideration transferred to acquire the business and the fair value of the separable net assets acquired. Unlike many other intangibles, it is not amortised but is instead tested annually for impairment in line with IAS 36 Impairment of Assets."

"The main criticism of the impairment only approach is that it can result in write downs of goodwill which some consider to be ‘too little, too late’. This can be particularly evident when a poorly performing acquired business is combined with a successful existing business. Subsequent impairment reviews will consider both businesses as a combined unit. The existing successful business can have high levels of internally generated goodwill. Since the internally generated goodwill is not recognised on the balance sheet, it essentially creates a buffer (sometimes referred to as ‘headroom’) between the balance sheet (or book) value of the combined net assets and the value of the businesses as a combined unit. In this context, the value of the business is often measured based on the present value of future cash flows. Despite the poor performance of the acquired business, the value of the combined businesses exceeds the balance sheet value of the net assets and no impairment loss is recognised."

https://ion.icaew.com/financialreporting/b/weblog/posts/goodwill-impairment-or-amortisation

[JoyofBricks8]

https://www.telegraph.co.uk/business/20 ... -flavours/


"The Trump administration has announced a ban on some popular e-cigarette flavors in the United States, including fruit and mint, to curb rising teenage use of vaping products, allowing only menthol and tobacco flavors to remain on the American market."

[77ss]

https://www.telegraph.co.uk/business/2020/01/02/us-announces-ban-e-cigarette-flavours/


"The Trump administration has announced a ban on some popular e-cigarette flavors in the United States, including fruit and mint, to curb rising teenage use of vaping products, allowing only menthol and tobacco flavors to remain on the American market."

For a (free) article on the matter, see:

https://www.marketwatch.com/story/feder ... 2020-01-02

It appears that the ban only applies to one sector of the e-cigarette market. Today's regulatory announcement by BATS may also be of interest:

https://www.investegate.co.uk/british-a ... 00046200Y/

[Walrus101]

Have 10 percent of my HYP in these now. There could well be something I dont know but yielding over 10 percent covered by cash flow I cant ignore.

This recent rally has now brought me back to marginally in profit including dividends received, just a shame I ever purchased these at the 4 percent yield when setting up the HYP.