RE:RE:RE:RE:RE:NCIB stalledFor those who want to improve their understanding of business ownership and the prudent path of capital allocation, start with quantifying the cost of debt vs the cost of equity.
Here's a good place to start:
https://www.investopedia.com/ask/answers/032515/what-difference-between-cost-debt-capital-and-cost-equity.asp From a very basic standpoint, there's a time to focus on debt reduction and there's a time to focus on buybacks, there's even a time when it's beneficial to retire both in conjunction.
What I'm seeing with GH is that as they pay down debt, it allows for opportunistic buybacks. The daily buying max doesn't get the job done, it's the purchasing of blocks from various sources that has had a meaningful positive impact for all shareholders equally.
Scenario A: Borrowing costs are 10%, company is overleveraged, shares are undervalued
Scenario B: Borrowing costs are 5%, company has very low debt-to-capitalization, shares are undervalued
A board of directors will navigate market/economic conditions, and attempt to make the best choice for all stakeholders in allocating surplus capital to improve integrity and health of the business. In the above two scenarios a rational executive would focus on debt reduction in example A. Conversely, in scenario B, an executive would make buybacks a priority over debt reduction. Note we have not discussed dividends because that is not the focus. By eliminating the ongoing costs of both debt and/or equity, it positions the business to pay dividends.
A. Debt
B. Equity
C. Dividend
By prudently managing A & B, it allows an entity to start/sustain/grow C.
Many people I've talked with over the years start discussing C long before they have a grasp of A & B. This goes for many businesses... some that come to mind, situations that were mismanaged by BoD and maybe influenced by loud stakeholders: BCE, VET, TA, AQN, INE, BTE, AFN, AW.un, NFI, IPL etc................. Capital mismanagement in some situations, slumping commodity prices in other situations, conversion from Income Trust to Corporation in situations
The story of Icarus was the fellow with wax wings who chose to fly too close to the sun. Some of these boards of execs were playing Icarus with a leveraged balance sheet and overextended dividends - when times get tough, dividends get cut. That's a fact. Something many fail to realize is that dividends are a "discretionary" payment, certainly not an obligatory payment.
So looking back at all this, lessons learned from watching mistakes of others. Going back in time I recall quarters and years when GH's dividend payment was flirting with a 100% payout ratio, even greater than 100% during oil patch downturns.
Executives here learned lessons from past exposure to periods of boom and bust impacting the Alberta economy. While GH feels more like a utility company over longer periods of time, we are not immune to O&G downturns. Best way to ride out inevitable economic downturns is to deleverage, maintain a manageable payout ratio (60-80%), and then make hay while the sun shines - that is, buybacks of the equity when available below its intrinsic value. The magic number here is approximately $14 intrinsic value. Execs here are doing all of this, and so far it looks to me they are doing everything right. When the debt is down, you can snap up shares as shares become available. Reduction of shares is paramount to building value for stakeholders long-term.
The dividend hikes will arrive, as I've suggested quite a few times the past 3yrs, we just have to wait for it. The fewer shares outstanding, the more capital available to the remaining shareholders.
Clients often asked me to explain buybacks... the way to explain it is that there's one raspberry pie, there's 12 people to feed. Everyone gets 1/12th of the pie. Not a big slice, but a slice.
5yrs later, there's another raspberry pie, but there's only 6 people to feed. Everyone now gets 1/6th of the pie.
The 1/6th slice is now
twice the size of the 1/12th slice. Which slice do you want?
At GH you could have a $0.48 dividend with no buybacks, or you could position the business for a $0.72-$0.84 annual dividend down the road after buybacks.
With GH, there's a maximum amount of surplus capital that can be generated each year. Over a ten year period, if the number of shares was reduced from 24.7mm shares down to 20.7mm shares, that's 4 million shares which don't require dividend payments. $0.60/yr x 4 million = $2.2mm in dividend savings, and that savings continues to climb as the dividend climbs.
One last thing to consider... As dividends increase they tend to support a higher share price. I am of the opinion that it is beneficial to focus on buybacks long before you raise your dividend. Take advantage of an undervalued share price before that share price becomes fair value. That day will arrive, will take time, maybe years, gotta wait it out - that's the smartest, and maybe the toughest, thing to do as a shareholder.
Cheers - enjoy the weekend
Wait for the news of NCIB renewal, it will arrive within days/weeks.
Wait for a dividend hike, it will likely arrive within 12-18mo. (hopefully sooner but I'm not counting on it)
Wait for another big poker win by Kasking, inevitable