(See below for response to this "article", already posted on the VOD board).
One word... rhymes with "rowlocks".
Anyone can push a button and run a screen, without any analysis into - indeed, knowledge of - the individual stocks.
CARD is highlighted, yet they quote the yield INCLUDING the latest forecast "special" element. If the point is that this is yield is perhaps not sustainable... well, um, yes, no ***t Sherlock. That is why "specials" are special - in this case, driven by high recurring free cashflows and a balance sheet only now approaching "optimal" leverage. The ordinary divi yield is more like 4.2%, still pretty decent, a good bit more than the UK market average AND covered 2x by current and forecast earnings. With the FCF profile likely to drive further shareholder returns over and above this, into the medium term.
And IMB? Recently reported the 10th SUCCESSIVE year of 10%+ dividend growth, and then committed - very firmly - to the 11th. Sure, cover is relatively (but not terribly) low on reported earnings, somewhat better (c.1.6x) on the underlying measure which they base their policy on - and as with CARD, the article totally misses the FCF point. IMB is one of the (few) blue-chips where FCF cover is ABOVE EPS cover - at 1.4x, only around the UK average, and on relatively predictable and defensive cash flows.
Sure, the utilities are running with relatively low cover levels... as they have since about 1998. With payouts - growing steadily in general, no more, no less - underpinned by monopoly (in most cases) inflation-protected revenues and highly predictable cash flows. Of course, utility stocks have plenty of pressures ahead of them - relatively low divi covers (but still well above 1x) are pretty low down the list.
And as for VOD... well, we've been through that before on here, ad nauseam. Suffice to say, anyone looking askance at reported EPS dividend cover probably doesn't own the stock, and probably never will... that is their prerogative (or problem, whichever way you look at it). There probably are safer c.7% prospective yields in the UK market.... aren't there? I am sure such people will name them!
There is virtually never a good time to sell if you are a Company Director, because someone will always read something into, or allege disloyalty.
I am more concerned with 'professional' Directors, who acquire Directorships like confetti. I can't say whether this Chairman brings anything to the party that another could not do, apart from his ability to get other Directorships.
There is an argument in a generally stable business like CF not to over remunerate, someone who has in essence only has to do about 8 meetings a year.
I've always bought my shares in the company, in the belief of the forward progression of card factory. Using my eyes and local knowledge, re numbers visiting the shops and paying at tills. I see it as a huge stab in the back for (whats his name) to sell his bonus and sink us small shareholders
He was also made Chairman of AO World in June 2016. He has not sold any shares, if he has acquired any, in AO world, but maybe its early days.
It would seem at Companies House he has a number of apparently active Directorships. So, it could be argued a professional Director coasting to filling his retirement fund as full as he can. I am always a bit wary of this style of Director, but I suspect on Corporate Governance rules, he may be due for rotation at some point, and he has been Chairman since 2014.
If (and I have no idea) CF have started looking around he may starting to sell down his shares.
"There is indeed a huge weight of research - both academic and practical - behind this debate, and yet the clear conclusion is... there is no clear conclusion. Not least as the debate is forever bedevilled by selectivity (eg. of timescales and sample sizes), subjectivity and, often, semantics."
"no clear conclusion" isn't a surprise. Investors have to make the best use they can of partial information.
Academic studies based on data, at least bring some objectivity to the issue. There's more scope for selection bias in opinions and memorable cases. Investors don't follow a random sample of stocks, the kind of stock an investor follows can change over time, and the memory of cases will be selective due to limited memory capacity (for most people) and confirmation bias. Still, I have to rely on my own opinion because each study usually sets out to investigate a single simple hypothesis. You can wait a long time for more detail. For example, the small firm effect (that on average, the stocks of small companies outperform the market) was written about in 1993, as one of the factors in the Fama-French 3 factor model. The effect proved to be unreliable and disputed. Any investors taking an interest in it had to wait until 2015 for a study with evidence that the small firm effect is real, if you control for quality. In other words, the small firm effect was fighting against the way 'junk' stocks are concentrated at the small cap end. I expect many investors had worked it out for themselves without waiting for the academics. For more info see https://www.aqr.com/Insights/Perspectives/The-Small-Firm-Effect-Is-Real-and-Its-Spectacular
Getting back to leverage, I expect it's most useful in particular circumstances, but I'm relying on 'common sense' and cases (essentially anecdotal evidence). It's fairly obvious that a growth company with capital needs can grow faster with leverage. If the business has a big competitive advantage and the market is reliable, then a lot of debt doesn't necessarily mean poor risk/reward. The best case I know (with apologies to anyone who read it on the CVR discussion) is Rockefeller's Standard Oil, which used most of the fractions of crude oil, for example kerosene (for lamps), while small operators extracted gasoline and dumped the rest. Along with the business model, market, lack of regulation, and Rockefeller's management skill, debt enabled him to get so rich that a top bracket of income tax was created with just one taxpayer: Rockefeller.
There's also a case to use debt to accumulate a bombed-out asset that's likely to recover, though it seems more problematic to me. In my opinion, borrowing to pay a special dividend is not a good use of debt. I only claim weak support from the studies on leverage, because I don't know of any that focus on the effect on returns of using debt to pay dividends.
Even if there was somehow a plethora of relevant and reliable studies, statistical studies produce generalisations to which there will be exceptions, and studies can't account for all the idiosyncrasies of a company or the market it's in. There will always be scope for disagreement about individual stocks.
"I have no idea what that post meant about historical resistance at 237"
Doesn't count for much does it?
No one knows where stock prices will move in the short term - charts, fundamentals, tea leaves, knowledgeable people lol!!, or asking you dog for an opinion - is all seemingly a waste of time.
You are either in it because you believe in it, and you think after a reasonable assessment that the finances look OK and the growth looks plausible - realistically you can never be sure - or you are just guessing.
Games -- Well in profit now - dividends included of course!! - No Champagne or Cigars on this investment so far.
I have no idea what that post meant about historical resistance at 237, it would be fairer to say that until recently the sp floor was at 268 and before that at 238. If CARD has recovered its outlook I would say the recovery should continue? But then that is just staring into the tea leaves anyway.
I was over-exposed so I have trimmed off the last slice from when CARD was heading to the bottom, but holding the rest for the dividend and the prospect of recovery.
On debt and so on, I am sure everyone else is right and I am wrong, you may as well borrow when money is cheap and cash is flowing as the mortgage man says. One thought has struck me though ... presumably the 950 stores already opened out of 1200 are the ones with the most potential. So from now on a squeeze on gross margin, and return on investment will get tighter even without a rate rise. CARD needs to see off some of the competition, amazed that Clintons hasn't yet made it onto the list of High Street casualties.
"The results indicate that investors are not being compensated for the extra risk they are taking on when investing with high-leveraged firms. Several previous empirical studies has come to the same conclusion."
There is indeed a huge weight of research - both academic and practical - behind this debate, and yet the clear conclusion is... there is no clear conclusion. Not least as the debate is forever bedevilled by selectivity (eg. of timescales and sample sizes), subjectivity and, often, semantics.
Are we talking about "high-leveraged" businesses, or the sliding scale of all levels of leverage? And how do you define leverage? Over recent decades we have moved away (quite sensibly, I think) from traditional measures of "gearing" (eg. net debt / net assets) and toward those based on hard cash and cash flow metrics - notably ND/EBITDA (importantly, the key metric of choice for debt rating agencies), though I would also advance the hitherto under-used ND/FCF. I don't think it's controversial to say that businesses typically go bust NOT due to an excess of debt but an insufficiency of cash flow (albeit the two are of course related) ... the recent high-profile examples of Carillion and Conviviality, while very different case studies, both bear this out.
"... So if I understand this right gearing\leverage is good until it is bad... Free cash flow as ever the key."
So as an effective practical summary of the essence of the debate, you'd struggle to do better than SM's encapsulation, as above (but only IMHO, of course!)
FWIW the CARD leverage level of 1.7x ND/EBITDA (both current and projected medium term) is merely broadly in line with the UK market average (if anything, slightly below)... always remembering that views of "optimal" leverage will vary enormously across sectors. And on a ND/FCF basis, the current (most recent FY) level of 2.8x is significantly below average market levels (not that this is widely observed - perhaps it will be more in the future... certainly should be IMO)... and every chance that growing FCF medium-term will see this fall appreciably, even on static debt levels.
So I certainly don't see CARD as high-leverage, on any relative basis... no more than moderate, at worst. Though equally, taking a relatively conservative view of the prospective long-term interest rate profile, I think the balance is now about right (as CARD management themselves appear to agree).
So if I understand this right gearing\leverage is good until it is bad.
Mm, bit like a mortgage really, comfortable until it becomes a worry. That depends upon your income against servicing your debt. Free cash flow as ever the key.
As to compensation, those bad boys (Good imo) over at Melrose have a habit of being rewarded handsomely for the extra risk and high leverage that they play with. Thing is they know the tipping point and when to get shot of it.
It will be the same with Card. Much to early to stop using it yet.
"The results indicate that investors are not being compensated for the extra risk they are taking on when investing with high-leveraged firms. Several previous empirical studies has come to the same conclusion."
The conventional theory was (and maybe still is) that debt increases risk so investors demand higher returns to compensate.
A study from 2008 found a similar result, except for utilities:
"We find that for utilities, returns increase in leverage which is consistent with the findings of Miller and Modigliani and Bhandari (1988). But for the other sectors, the relationship is negative which is similar with the more recent work of Korteweg (2004), Dimitrov and Jain (2005) and Penman (2007)."
So readers can assess the likelihood of selection bias - I googled "leverage and stock market returns", and only looked at the first page of search results. I followed up only the two links above. I saw no results indicating that more leverage is good for returns, except that my first link looked that way, with "suggests that common stock returns increase with the amount of debt". It turns out, that's the conventional wisdom, which empirical studies contradict.
"What I don't really understand is why borrow to pay a dividend (albeit only part)... Why not just pay a smaller dividend and use the remaining to lower debt... Surely this makes more sense long term..."
Mong - it is at least clear that it is entirely deliberate... otherwise, they wouldn't have paid it. Special dividends are fully discretionary, even more so than ordinary divs (management will often go to great, and sometimes excessive, lengths to keep paying an ordinary dividend).
It essentially comes down to "efficient balance sheet theory" - debt is cheaper than equity, particularly (but not entirely) due to the tax deductibility of interest payments, so it is more "efficient" to fund your business with a reasonable amount of debt. Of course, at some point the relationship reverses, if debt is so high as to jeopardise the sustainability of the capital structure... at this point, both debt and equity become progressively more expensive, exponentially so.
So the challenge is, what is a reasonable balance of debt and equity? Companies have different views on this - and it will naturally vary (significantly) between different business profiles, depending on the relative stability, predictability and visibility of core profitability and cash flows, etc. CARD clearly think this is around 1.7x ND/EBITDA (to use the most commonly applied metric, by investors and rating agencies alike) - some companies see it as a bit higher, others somewhat lower.
Of course, not everyone subscribes to the theory! For some, the best level of debt is none, and where there is debt, it should always be paid down as first priority - for them, it is very unlikely that what CARD have been doing will meet with approval. It's a view most prevalent among private investors, I would observe - but it is still an active debate among at least some professional market participants.
But either way, it is at least clear what CARD thinks - there should be no confusion, whether you agree with it or not. FWIW I am a believer in the theory and strategy - the practical maths and economics of it are easily compelling enough - and I also think CARD have the balance broadly about right. In any event, as we discussed before, CARD are clearly now signalling that their balance sheet is now at the point of optimal "efficiency" - which means that future dividends (including specials) should only be declared within the constraint of current leverage levels.
"... net debt rose £25m last year (FY18), but after £83m in cash dividends (including c.£51m as "special") - in other words, the business generated positive free cash flow of £58m AFTER new store investment, and positive net cash flow (c.£7m) after ALL of store investment and ordinary dividends."
Apologies to all - as the eagle-eyed may have spotted, there is a mistake in my figures as previously quoted.
CF generated positive net cash flow of c.£26m after all investment (including new store spend) AND ordinary dividend payments in FY18 - not the £7m I quoted (got my ordinaries and specials mixed up).
What that means is the most recent 15p special divi was broadly half funded by residual free cash flow, and half by increased borrowings - or alternatively, if they hadn't paid a special (entirely discretionary), we would indeed have seen net borrowing falling by c.£26m, rather than rising by a similar amount. A pretty healthy picture I would say, and should offer considerable comfort to the debt-averse...
"So I don't mind the investment in new stores, but let's not pretend the development and the special dividends are from free cash, it has required borrowing to do both."
Marktime - it is "double counting" to argue that both store investment and special dividends has required borrowing. Yes, net debt rose £25m last year (FY18), but after £83m in cash dividends (including c.£51m as "special") - in other words, the business generated positive free cash flow of £58m AFTER new store investment, and positive net cash flow (c.£7m) after ALL of store investment and ordinary dividends.
So yes, the "special" dividend commitment last year was funded only partly from "free" cash and partly from new borrowing - but I don't think they ever pretended otherwise? It was clearly predicated on the basis of "surplus" cash, with leverage (previously and otherwise) below stated target 'optimal' levels.
Going forward, the situation is now clearer IMHO - they see the current leverage level (1.7x ND/EBITDA) as the medium term 'optimal' level, so all free cash flow (ie. after net store investment) can be returned in dividends, ordinary plus "special" - no more, no less. It doesn't mean net borrowing will not rise again, but only if cash profitability (ie. EBITDA) also rises, if they stick to their leverage targets (and they have again stated that they don't expect much growth in EBITDA for this year at least).
"My biggest problem remains with the apparent mis-management of foreign exchange and the timing of peak buying at the worst possible import prices... Something really stinky..."
You maybe make a more valid point there - albeit a tough one to put a precise finger on. One explanation (possibly too kind to them?) is they have stuck to their guns on hedging a broadly fixed proportion of forward costs, for a fixed period going forward... this means that they were probably less severely hit when the £ went through the floor, but conversely they are now benefiting less than they might've done with the recovery. And lest we forget - it's a decent recovery from the lows, but c.1.41 GBP/USD is still well below the 1.60 and more seen for much of the pre-2016 period.
"The long term success of CARD rests on its ability to see off the competition and instead we have cheap and cheerful aisles in supermarkets and me-too ventures like Cards Direct emerging. I suspect there is little brand loyalty down at the discount end of the market, it is all being fought out on price."
Yep, probably correct there too - we shouldn't rely on brand loyalty for CARD, and it doesn't sound like they are, either. Hence their reluctance to be seen to raising prices, although the reality (eg. with new, higher priced ranges) may be somewhat different. But brand awareness will still count, and this is still growing for CF... as will selecting and sustaining the best locations. People still want to buy cards - that is the good news - but they want to buy them as cheaply as possible (for the most part, anyway). It is up to CF to make it easiest, and cheapest, to do so at CF rather than anywhere else.
I bought two 500 lots fairly recently at 220 & 203 (inc. fees) and was showing a £200 loss as of yesterday. Now only a £57.50 loss on the fist batch but a £30 profit on the second so happy about that. I bought solely for the dividend but never nice to see them worth less.
Anyway...downtown in good old Birko today I did my usual look at the 2 Card Factory shops and the Clintons one. Both CF had queues at the tills and people browsing whilst the Clintons didn't have a soul in it. No one...zilch, well apart from the saleslady at the till. Much bigger shop too so the rent & rates must be more.
Something/one has to give one day.
while I am overweight in CARD I should be agreeing entirely with those sentiments which advance the sp, I think TX2 may have a point albeit somewhat extreme.
On the one had CARD has increased borrowing by £25M or so to open about 50 new stores adding (hopefully) a ? £M recurring increase in revenues at about 22% margin, So it should be a pretty good investment. Retail is not dead after all, if you pile 'em high and sell 'em cheap. We are about 80% through the business plan with maybe 5 more years of expansion at this rate to come. That will require continued investment and some of that will be from increased borrowing unless CARD pays it down.
On the other hand, as the report admits, recent increased net borrowing has been necessary to fund the special dividends elsewhere described as being paid "from spare cash". Who do you think you are kidding, someone. As a consequence debt is higher than I feel it should or could be. I was expecting a cut to the specials last year, and we had been prepared for an end to them now but someone has put the interests of rebooting the sp ahead of what might have been better for the long term of the business. I take your point Bill and agree this is a 275p stock (are we on our own), or it would be without so much debt, but it needs to find its level based on sustainable payouts not on special dividend bribes.
All will be forgiven of course if a rebound in profit allows a 5-10p special AND net debt reduction.
I wonder what was meant by opportunities for further vertical integration? Something with a cost attached?
My biggest problem remains with the apparent mis-management of foreign exchange and the timing of peak buying at the worst possible import prices, costs are up £13M while foreign exchange hedges lost £7M (roughly). Eh? I am sure you will tell me if I have mis-read those numbers. Minus marks for finance and purchasing departments. Where in the report does it say we are going to get a £20M upside now we are back to $1.41 - instead it says foreign exchange headwinds should ease by 2020? Eh? Something really stinky.
Add in the resistance to raising prices, increasing wages, small transaction values on low markup items, and an unconvincing website channel. Not much scope for efficiencies in an already efficient business. Lots of pressures even before we add in general High Street gloom. The long term success of CARD rests on its ability to see off the competition and instead we have cheap and cheerful aisles in supermarkets and me-too ventures like Cards Direct emerging. I suspect there is little brand loyalty down at the discount end of the market, it is all being fought out on price.
Despite which CARD has made revenue progress and a healthy profit from its basic store formula and new store openings. A deserved response in the sp even before the special bribe. So I don't mind the investment in new stores, but let's not pretend the development and the special dividends are from free cash, it has required borrowing to do both.
"The entire business is not financed, practically speaking, by borrowing, but by a mix of equity and debt... in this case, some £680m of equity (340m-odd shares @ 200p) plus just over £160m net debt."
Are you confusing market cap with equity on the balance sheet? ii is currently showing "Market Cap (GBP m) 679.163" (£697.67 million on Hargreaves Lansdown). On the balance sheet in the results, "Equity attributable to equity holders of the parent 218.4" (£'m).
Think what the results show along with Karen's mixture of "go get em" and sensible caution is that nothing has really changed.
We have never had BAD results as some market commentators would suggest. For sure we have had "headwinds", how many times was that mentioned? To be honest there is nothing new here.
The market had got it self into a lather over this, not grasping the business model or the niche high street roll. Lot to be said for the small investor counting the number of shoppers every time he goes by, and chatting up the manageress on occasions.😁
The story is very much intact here although Games' comments about an undeserved beaten up share price are valid.
Well said, surprising how many investors here do not really understand business, with the free cash flow Card have there is no pressure to write down debt in a hurry, and in any case only some £18m is due within the next five years, the rest is due at some point after that.
I agree with on a fair price of £2.75, but I think it may not be too far away. I was particularly encouraged to see the comment that some prices had been raised, quite gently put in the report, as they still have this low price history surging in their veins.
At 200p a good buy with an excellent divi and real potential for growth.
"After two recent profit warnings and a slew of bad news elsewhere in the retail sector, income investors may well have feared the worst ahead of LSE:CARD:Card FactoryÂ results this morning.To their relief, the company announced a 2.2% rise in the ..."
"But I do have a fundamental problem with the company.It has a horrible balance sheet with a mountain of debt, in fact the entire business and beyond is financed by borrowing.... Eventually this debt has to be reduced which means the majority of future profits need to be retained."
And conversely, I have a problem with narrow accounting-led perspectives which ignore the practical realities of hard cash flow and real-world financing. On any reasonable measure, it is hard to defend the "horrible" tag for the CARD balance sheet.
The entire business is not financed, practically speaking, by borrowing, but by a mix of equity and debt... in this case, some £680m of equity (340m-odd shares @ 200p) plus just over £160m net debt. I would call this relatively prudent, given the (relative) resilience of core revenues and cash flows... and likewise the current (and projected medium-term future) ND/EBITDA level of 1.7x, interest cover (EBIT) of nearly 30x, an 'Altman Z' score of 3.4 (comfortably above the traditional "comfort" level of 3)... etc, etc. Moreover, I think the debt rating agencies would broadly agree.
In the real world, there is no such thing as "retained" profits, it's merely a notional accounting construct - you either retain cash, or deploy it in the business, or return it to shareholders, as ultimate capital owners. It makes little sense for CARD for hoard cash, after all core investment demands, until such time as debt is indeed deemed excessive - returns on cash are still next to nothing, and probably best (for us) that they return it rather than be tempted to deploy it outwith their core competence.
The key point is, even with a moderate downturn in FY18 (due mainly to exceptional capex spend), free cash flow was nearly £60m (vs. £69m FY17) - in other words, they could pay down all net debt in well under 3 years, if they had to. Currently, they don't have to, and I think it would be ill-advised and excessively prudent as things stand.
As for the FY results, I won't dwell on the detail but all very solid in the circumstances IMHO. With a couple of very encouraging (or more reassuring?) comments on market trends, as others have pointed out. Even on the lower FCF (as above), still a FCF yield of well over 8% @ 200p (vs. 10% for FY17) - with the clear (and new) steer that going forward, total dividends should broadly equal FCF now that leverage is in line with their medium term target.
It's a long term story, of course, and I wouldn't expect any rapid return to previous highs in the current retail (and UK market) backdrop - but still worth 275p "fair value" for me. And even if it stays down here, you have the prospect of a reasonable equity market total return (ie. 8-10% pa) from dividends alone. Still a Strong Buy.
Plus points.Firstly I am pleased for holders that the results have been reasonably well received.Secondly I commend the company on the detail in the accounts;the information they give on the overheads of the business is very clear & interesting.
Whilst I agree that CARD is doing better than most retailers it is still having to work very hard indeed.Increasing number of outlets,product range etc but still margin & net profit level is in modest decline.I do not think it is going to get easier more importantly neither does the company.
But I do have a fundamental problem with the company.It has a horrible balance sheet with a mountain of debt, in fact the entire business and beyond is financed by borrowing.At the moment it can finance the debt at present interest rate but this debt pile is increasing; by £25m last year which was spent essentially to fund the special dividend.
Eventually this debt has to be reduced which means the majority of future profits need to be retained.
Final Div up to 6.4p and a special expected to be declared but not at 15p like last year 5-10p see below.
Our unique, vertically integrated business model remains strong and we have now established a solid platform for future growth, with our four pillar strategy continuing to support strong cash generation and a progressive dividend policy. We currently expect to declare another special dividend with our half year results in the range of 5-10p per ordinary share.
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