I was tempted to buy recently due to the 9% dividend yield, but a closer look has given me concern for pause:
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The company faces strong head winds in terms of regulations, particularly with Rishi’s latest plans. Admittedly most of their income comes from the US, but even there the long term smoking trends are in decline (50% cigarette decline since 2005 Current Cigarette Smoking Among Adults in the United States | CDC)
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Revenue and Free cash flow has been good, but not spectacular (single digit growth per year).
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The debt is growing significantly, short-term debt exceeds short-term assets. The same would be true for long term debt if the long term assets weren’t inflated by a ridiculous good will value (84% of long-term assets are good will!). This isn’t Coca Cola, Microsoft or Apple!
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The return on capital employed is 9%, but their Weighted Average Cost of Capital (WACC) is 7%. So they’re effectively borrowing at 7% and making a 9% return - little room for error.
5.I can get 5% risk free return with a bank account, this feels like a significant amount of risk for a 4% return - the share price has falled 25% in 1 year and is now at 2011 levels :-(.
- If you stick the Free cash flow into a DCF model with conservative values for growth (1 or 2%), the fair value comes back at around 20% below the current market price.
Happy to hear counter views and thoughts…