LIQUOR STORES NA LTD 4.70 PCT DEBS T.LIQ.DB.B

RE:Is LIQ Stock Buyback Wise?

[Goldbuggy1]

Goldbuggy1 wrote:
Personally I think it is one of wises things this company can do right now mostly because it is the best investment they can make right now. Just compare this to the New Jersey Deal which I think was a good one for LIQ. The company spent $15M US (about $21m CAD) to buy a 51% interest in a company that has Sales of about $49M US or our share of about $25M US ($35M CAD). If Gross Margin on this is only 25% and Net Profit is 20% of that, then Net Profit would be $1.75M CAD. Cost of borrowing would be from the Revolving Credit at first but later can easily be turned into a Debenture, at say 5.85%. So on $21M CAD borrowed that is about $1.23M. So our Net Earnings on this deal would be $1.75M - $1.23M = $0.52M. So on a $21M investment our net return is $0.52M or 2.5%. Now look at our stocks paying a 14.6% Dividend and buying back shares at say $8 / share. With TSX Approval we can buy back up to 10% per year. So in this year 2.75M Shares at a cost of $22M (almost the same as the New Jersey Deal). Our cost of borrowing would be 5.85% or $1.29M. Our Dividend pays $1.08 per share so on 2.75M Shares, that is $2.97M. So our savings on Dividend Payments alone would be $1.68M, let alone reducing our Outstanding Shares by 10%. Or a net return on investment is 7.6% and triple the New Jersey Deal.

But what if by small chance the company decides to stop paying a Dividend? Is it still wise to buy back shares at $8 / share if the company won't be saving money on Dividend Payments? Last year in December the company sold about 4M Shares at a price of $14.65 / share. If the company buy back at $8 / share this is a profit of $6.65 / share. So buying back 2.75M Shares would make them a profit of $18.3M if only on paper and not in cash. Since it would reduce our Outstanding Shares by 10% also this should increase Net Earnings per Share by 10% which in turn should eventually increase our Share Price.