Imperial Brands Share Discussion Threads

[shareideas1] 11/4/2024 16:55

Yes they are in a post Covid super cycle having been bailed out through Covid...

[fenners66] 11/4/2024 16:32

You mean the profit would go up,debt down, dividends and share price up and some non ESG fund would come and offer us a 40 percent premiumm and possibly sack some of the directors?
Terrible if you are a director without a contractual massive pay off. Not bad for every shareholder whom also get the chance to reject it of course.

[valuehurts] 11/4/2024 12:29

Lol if imperial reduces debt it will be taken over and loaded with debt by PE. They will always hold quite a lot of debt. They won't reduce it much further than current levels.

[fenners66] 10/4/2024 14:37

Sorry off topic but Delta airlines results just landed beat expectations and "no sign of demand letting up"

[fenners66] 10/4/2024 13:58

So then you are saying whilst holding up Buffett to be an amazing investor ...
that he got it totally wrong to invest in the US airline industry at all , any time as its not a good long term
business. Not just poor timing.

So he makes mistakes - very very big ones?

Why then do many quote as a reason for buybacks - its good enough for Buffett ?

Anyway I don't think the merits or demerits of buybacks have anything to do with it.
The institutions may not dictate that much to the BODs but one thing they do is share BB
since they hold the cards they get what they want.

[shareideas1] 10/4/2024 13:52

Right now yes... but hugely capital intensive and extremely cyclical earnings which create the natural boom and bust

[louis brandeis] 10/4/2024 13:51

So airline stocks have a medium-term trading opportunity based on post COVID under-capacity. That doesn't make them good long term investments. Their quality of earnings is poor, just like the residential house builders. Poor in the sense, not of size, but of long-term sustainability.

[fenners66] 10/4/2024 13:44

From a Jan 24 article ..

Delta Airlines pre tax $6.44bn +119%
United Airlines $5.16bn + 94%
American Airlines $3.26bn +52%

Right now they can charge almost what they want...

[louis brandeis] 10/4/2024 13:42

fenners

Yes, decreasing debt will increase intrinsic value and it is an option open to the management at anytime going forward.

Of course, generally, one has to be very careful with debt reduction because if the market cap is small enough reducing debt too far increases the chances of having unwanted suitors (funding buyouts with debt). And then, to the likes of you and me, the opportunity of benefitting from future earnings and cashflows disappears completely. However, I think this is very unlikely here. Perhaps likely with some of the small cap house builders ATM - Crest Nicholson, for example.

[shareideas1] 10/4/2024 13:29

Airlines are terrible businesses

[fenners66] 10/4/2024 13:26

Louis

You can increase intrinsic value for every shareholder by removing the debt (as explained above).

This is more relevant with a mature company and a declining market like IMB as they are less likely to
need further large funds to reinvest in the business in the future.
The new CEO seems to agree as he believes sticking to the knitting and improving the efficiency of the
core business is the way forward

[louis brandeis] 10/4/2024 13:01

Thank you Huckers. I appreciate that. :)

[fenners66] 10/4/2024 12:59

The US airlines have a great business.
Right now they can charge what they want (almost) and are charging more because they cannot get planes.

Their problems were caused by buybacks about 5 years ago.
Since they knew best they bought back cumulatively $100bn
Then covid etc and suddenly they needed , guess what , $100bn just to survive.
I think it was massive share dilution as well as govt funding that kept them alive - too big and too important to fail.

Buffett bailed and lost $7bn

[huckers] 10/4/2024 12:55

Louis. A very lucid set of arguments/explanations. Thank you.

[louis brandeis] 10/4/2024 12:54

Woodford made some mistakes that cost him. One of his mistakes was to assume retail investors understood what 'patient capital' means. Obviously the council involved didn't understand this word 'patient' and neither understood the mechanisms of an investment trust. Councils shouldn't be investing in such things. Lots of things were wrong around Woodford. All very depressing. Don't even mention Hargreaves Lansdown

[louis brandeis] 10/4/2024 12:47

fenners

1. I don't understand why you think it is different for Buffett. He is an ordinary shareholder the same as all the other Berkshire holders: It is a publicly listed company. He owns 16% and is the chairman. It isn't a private company. As far as airlines go the issues of his failure investing in airlines isn't to do with the buybacks it is more to do with airlines fundamentally being bad investments due to their ability to suck up capital for new aircraft (purchase or lease) whilst having zero competitive advantage and having to price like commodities.

2. OK, so make it obvious that the coupon rate is pretax. What is obvious is that sustained buybacks executed correctly overtime work for shareholder value. Spot decisions would include many variables some of which we are not privy to. So it is difficult for us to say whether paying down that debt was the obvious answer. If it was I'm sure it would have been done. You have to have some faith in the CEO and CFO, if you don't then sell your share.

3. If you payback the debt the problem seemingly disappears only until you might need to increase debt financing again. Don't forget credit investors have a market too.

4. Intrinsic value has EVERYTHING to do with buybacks. If shareholders are willing to sell to the business something that is worth £1 for 50p the business should buyback as many it can afford to. In this scenario you are increasing shareholder value for those shareholders that remain. The opposite to this is if you are executing buybacks at a share price of £1 when they are only really worth 50p: in this scenario you are destroying shareholder value.

5. I think you raise a good point which is what I refer to in that the business has to be a good one and on a sound financial basis to begin with in order for buybacks to work and also to be taken seriously by investors that know what they are doing. I think you do have an argument to pay some more debt down but there is an opportunity cost with buybacks and future interest rates are (were?) expected to fall.

[fenners66] 10/4/2024 12:37

As for just how much liquidity matters more to institutions look at Woodford.

He made an absolute fortune for himself playing with other peoples money.
It really did not matter if their investments went up or down he got a % .
Could there be a more damning indictment of that then the suspension of his fund so no one can withdraw
and he was still taking a % out ?!

There he is making a fortune - until it all falls apart after an institution wants to pull its cash out and there
is no liquidity.
All the other fund managers who had not learned by then suddenly woke up - liquidity is key and stuff the
arguments of the investors

[marktime1231] 10/4/2024 12:30

et tu spud

[fenners66] 10/4/2024 12:15

boomdaboom "In the long run the only thing that determines the price of a stock is the earnings per share"

Too simplistic.
If you have a company with EPS and no cash - there is no long term.

[louis brandeis] 10/4/2024 12:09

"In the long run the only thing that determines the price of a stock is the earnings per share."

Or net asset value per share if it is real estate/asset based.

[fenners66] 10/4/2024 12:08

Louis -

1, already mentioned Buffett and why his buying back BH is different for him. You may not know that what is good for Buffett he does not think is good for either most companies he invests in or those he does not trust to value their own shares correctly. He also broke a habit of a lifetime some years back and invested in the US airline industry who were embarking on $100bn in buybacks (normally he does not buy companies that do em) and lost $7bn on the stakes when they needed emergency funding to save themselves - $100bn of it .

2, Of course I know the pre / post tax position of debt finance and some time back did the numbers. Post tax return on repaying IMB's expensive debt instead of buyback gave a better return.

3, Regarding ESG - you seem to be agreeing that because of "other restraints " refinancing existing debt may not be optimal - agreed so spend the buyback money on repaying the debt and the problem disappears.

4, What is this intrinsic value/ cost of BB got to do with shareholders ? They own the company - dividends are not a cost to the company they are giving the shareholders their share of profits.

5, Enterprise value (often misunderstood) is hardly ever discussed when writing about buybacks. I think it is too complicated for some. A company's worth is what the market thinks it is. A discounted future cashflow or a dividend model or PE based on EPS or all the assets + future earnings.... etc. But whatever model someone is using that Value is reflected in the make up of the shares and the debt combined.
The BB theory is if you reduce the number of shares you increase the remainder value. But you also reduce cash (important when credit is tight as the lack of cash kills a business) or you increase debt. When you do that you reduce earnings or earnings potential - if you have more debt you have more finance cost -if you have more cash - like Buffetts BH $100bn + you get $bns in interest (at the moment). So if you value the business on an earnings basis the relative enterprise value falls.
But if you remove the debt , earnings increase and the % of the enterprise value reflected in the shares goes up.
To give an example people can understand - take a house with a mortgage - reduce the mortgage and your value of the equity in the house rises. Not only that but with a lower LTV you get a better interest rate.

But all that is irrelevant to the institutions that buy the shares with our money who therefore control the boards and demand liquidity of buybacks.

[louis brandeis] 10/4/2024 12:07

As an owner of the company you have benefitted in the fact that there are less owners in the company going forward who will be entitled to the earnings and cash flows that Imperial Brands make. The underlying net assets per share have also improved although that has less meaning here to IMB as its valuation isn't asset based.

Of course the volatility of the market will hide that short term and for it to be of real worth share buybacks have to be at a level where they really do have meaning to the reduction in ordinary share numbers - and not be diluted by placings for executive bonuses - and carried out over some length of time.

Just look at the share price performance of Next over the last two decades. Perhaps one of the best examples in the UK of share buyback execution. Shares in issue have reduced by more than 50%. Its share price performance (long term based on earnings per share) is not just the product of sound management in its market, it is also the product of sound financial stewardship. Berkeley group is another one since the financial crisis. Look at their charts. Of course you need the basic good business to be in place first and most importantly or it doesn't work. Companies execute buybacks when they simply can't afford to and in that case it is meaningless. When buybacks are wrongly executed they give buybacks a bad name. That isn't the case here.

[boomdaboom] 10/4/2024 11:50

This discussion on buybacks is really quite ridiculous. In the long run the only thing that determines the price of a stock is the earnings per share. Buybacks increase the earnings per share by reducing the number of shares in issue. Therefore the price will be higher than it would have been absent the buyback. Simple. Not complicated.

Of course, it is perfectly possible for the shares to fall in the short term despite the buyback if the market believes the earnings prospects are deteriorating. You can agree or disagree. That is what makes a market. If you believe in the companies underlying earnings, then the buybacks are simply making the shares even more attractive and you should buy more!

[spud] 10/4/2024 11:28

OK, simple question.

How exactly, since the commencement of the buyback here, have shareholders benefitted?

spud

[louis brandeis] 10/4/2024 10:54

The issue of share buybacks versus debt repayment is not a no-brainer decision that fenners would like you to believe. Before I go on, just remember the greatest investor of all time, one of the world's richest men, Buffett, is an advocate of share buybacks.

Remember, those headline coupon rates are paid with the added benefit of being tax deductible so are paid out of PRE-TAX EARNINGS rather than earnings. Capital repayments don't have such a benefit. So if you are comparing against buybacks you can't use the headline coupon rates for comparison.

Also, buybacks should be done when the well-respected and traditional methods of calculating intrinsic value in a business indicate the shares are cheap with respect to intrinsic value. No point paying back a pre-tax coupon of circa 8% now to find out a missed opportunity for buybacks if the share price then rises above intrinsic value when you next have the opportunity. In other words: if you have the money most debt can be paid back at anytime whereas purchasing shares at below intrinsic value only arise whenever there is market opportunity.

The other issue that might cloud the water is the ESG constraints and restrictions now being placed on businesses by prospective creditors. That 8% coupon and its replacement might come from part of the credit market which doesn't give a toss about ESG. Lower rates of credit might come with very restrictive scopes of operation or ESG targets attached that Imperial Brands might not want to entertain so easily.