Nukester's Conundrum: NCIB Vs. Debt Vs. Kasking-Risk You knowwww, Nukester, you really are a troublemaker. But that's why everyone likes you.
Our Fundamentals Guru,
TLV, he won't speak on this snippy Debt Vs. NCIB comment from Nukester because he's likely working in a licensed capacity and cannot engage with us regular Joes anymore.
He probably watches over this message board, kind of like a Canadian Value God.
So be careful what you say!
He's watching.
Paying down Debt vs Buying back shares. That's a lengthy discussion.
Many bar stools and
Sage opinions will be required.
Much depends on market price of shares today and the expected intrinsic value of them going forward.
Kasking prefers we use round numbers. You can see why. The man counts thousands the way I count $20's. Difficult to keep pace with him. Have you seen the price of live cattle lately? Remember back during the Pandemic when he loaded up on cattle during the spring auctions? Price then was $125 per hundred weight, price today is $220 per hundred weight. He may have cornered the market. The legend grows with each passing quarter. Still waiting on BNN to request his guest appearance.
Nominal Cost of Debt: Yes, there's probably $24mm owing on the Revolving LOC.
Last I checked, GH had qualified to borrow at Prime Rate, so let's say cost is
7.2% today.
Real cost of Debt: Accounting stuff
(Example of $8,000,000 Debt reduction Vs Share buyback)
- Interest expense is a pre-tax cost, making it less expensive to carry
Taxes owed are reduced by interest paid
$8,000,000 nominal cost at 7.2% = $576,000/yr
Providing a reduction in taxes owed of $132,480
Net cost of debt = $443,520
True cost to company =
5.54% -------------------------------------------------------------------
Common stock Overview:
$9 market price
$12 target price
Conservatively
Undervalued by 25%
-----------------------------------------------------------------
Nominal Dividend Cost:
Today's Dividend yield 4%
12mo forward Dividend yield 8%
- Dividend is an after-tax disbursement of capital, so true cost of dividend is the pre-tax yield.
We can look at today's Half-dividend and then double it for future dividend, but don't forget the best part!
Real Cost of Dividend:
Current dividend yield of 4%
True cost of current dividend:
$320,000
Add back tax paid @ 23%
$320,000 / 0.77 = $415,584
Current cost of dividend =
5.19% Future cost of dividend is double, if dividend is doubled.
$831,168 total pre-tax cost of future dividend expense, horse apples to horse apples
Future dividend, True cost to company =
10.39% Cut number in half if you don't think we will double the dividend (I think we might)
But wait, there's more!
This now sounds like a Stockhouse Infomercial selling common stock on the home shopping network at 2am.
Buying back
UNDERVALUED shares.
Buyback $8,000,000
Immediate return of +33%, based on Conservative intrinsic value of $12
Bake in the immediate investment return of 33% for the share buyback.
Real Debt Cost: 5.54%
Real Dividend Cost today: 5.19%
Real Dividend Cost 12mo out: 10.39%
Return on Investment from NCIB: 33.00%
This is the
BONUS ROUND for Nukester. Behind 3 doors lies the prize.
Which Door will he choose?
Door #1 Debt Reduction today:
+5.54% Savings
-5.19% Cost
Net = 0.35% return
Benefit: De-leverage the balance sheet
Door #2 Share Buybacks today:
-5.54% Cost
+5.19% Savings
+33.00% ROI
Net = 32.65% return
Benefit: Improve per-share metrics by investing in undervalued business, positioning for a dividend increase
Door #3 Share Buybacks 12mo forward:
-5.54% Cost
+10.39% Savings
+33.00% ROI
Net = 37.85% return
Benefit: Improve per-share metrics by investing in undervalued business, post-dividend increase
There is no right or wrong choice and many more variables in flux.
All in the cards.
The beauty of the Buybacks: We are buying an appreciating asset at a discount.
The ugliness of dividends: We are disbursing after-tax capital to shareholders.
(If you re-invest your dividends, then you are creating your own NCIB)
Kicker: My guess is that we are paying down debt until an "Unspecified" total debt target is met. Once the target is met, then Execs are positioned to discuss increasing the dividend.
This was a 4yr chess game; we are currently in the 4th year.
Staring at the game board won't tell you the outcome.
Just as the stock charts don't tell the real story.
3 Pawns and a Knight have been sacrificed to capture a Queen.
GH is positioned to win match on behalf of ALL shareholders.
We all participate equally on a PER SHARE basis.
Keep an eye on Kasking in the next WSP tournament.
You'll get good feeling about GH's 2024.
The best time to buy an asset is when nobody else knows it exists.
Canadian money managers and investors have yet to discover GH.
We are an invisible micro cap on the TSX, quietly improving its fundamentals each quarter.
If we were listed on a US exchange today, the share price might be closer to $12-14 range.
So let's take advantage of cheap shares while they are still cheap, following in the brave footsteps of
TheBridge.
Maybe the buying is complete; that was still a respectable NCIB investment the past few years.
Maybe it's time to slow the buying and get ready for the paying.
That's what
Cpeczek suggested earlier.
He's onto something.
He's smart.