Supermarket troubles

[Nimrod103]

It is nevertheless an interesting choice and they could have upped the dividend which is I guess what TJH is implying.

It's all the fault of people who invest for dividends, who put more store by a record of continuously-increasing dividends, than they do with cash in their pocket. That implies companies should only ever pay dividends that they think are sustainable in the worst years. So what do they do in the 90% of years that aren't the worst? They use their cash for buybacks as it's more flexible.

The classic example is the big oil companies, who have to ride the cycles of the oil price, but vary their divis far less. One way they achieve that is that if they have a bumper year because of eg Iran blocking the Gulf, they end up buying back £10bn's of shares, but then buy back almost none in a bad year for the oil price.

But in theory, large integrated OilCo's should not fluctuate so much with the oil price. When World oil prices are low, they make their profits downstream.
Supermarkets should also not be cyclical businesses, as demand for food is fairly constant.

[Dod101]

It's all the fault of people who invest for dividends, who put more store by a record of continuously-increasing dividends, than they do with cash in their pocket. That implies companies should only ever pay dividends that they think are sustainable in the worst years. So what do they do in the 90% of years that aren't the worst? They use their cash for buybacks as it's more flexible.

The classic example is the big oil companies, who have to ride the cycles of the oil price, but vary their divis far less. One way they achieve that is that if they have a bumper year because of eg Iran blocking the Gulf, they end up buying back £10bn's of shares, but then buy back almost none in a bad year for the oil price.

But in theory, large integrated OilCo's should not fluctuate so much with the oil price. When World oil prices are low, they make their profits downstream.
Supermarkets should also not be cyclical businesses, as demand for food is fairly constant.

Over the market as a whole, supermarkets are probably not that cyclical but the trouble is every so often one of them will make a big push to take market share off the other and thus start a price war o which the other feels the need to respond.

Dod

[vand]

People are of course free to take a view and invest or not invest in anything legal that they want - differing views are what make a market. At some point one has to believe that anything publicly traded security should be bought based on its current price and estimates of future cashflows.

In supermarkets and most other competitive, low margin/high-turnover businesses the predictability of that cashflow is what is difficult to judge. When your business model is based off huge turnover and scraping by on a 2-3% gross margin then your profit can be highly variable. These are the type of businesses that Warren Buffett doesn't like - low margin, low ROI, no moat and high labour & fixed costs - but you can still do well out of them if there is good management in place that gets it right and are able to find efficiencies & improve margins to allow the operation gearing to kick into play. You can also do disastrously if the opposite is true - see ASOC/BOO.

[ursaminortaur]

But in theory, large integrated OilCo's should not fluctuate so much with the oil price. When World oil prices are low, they make their profits downstream.
Supermarkets should also not be cyclical businesses, as demand for food is fairly constant.

Over the market as a whole, supermarkets are probably not that cyclical but the trouble is every so often one of them will make a big push to take market share off the other and thus start a price war o which the other feels the need to respond.

Dod

Demand for food is fairly constant though growing as the world population increases but supply isn't. Crop failures occur some years, plants are themselves seasonal as are animals eg lambing season. To some extent the seasonal nature can be overcome, extending the season by growing in greenhouses or artificial environments and for some products shipping them in from the Southern hemisphere when they aren't available in the North, freezing products etc but those all add extra expenses.

[Nimrod103]

Over the market as a whole, supermarkets are probably not that cyclical but the trouble is every so often one of them will make a big push to take market share off the other and thus start a price war o which the other feels the need to respond.

Dod

Demand for food is fairly constant though growing as the world population increases but supply isn't. Crop failures occur some years, plants are themselves seasonal as are animals eg lambing season. To some extent the seasonal nature can be overcome, extending the season by growing in greenhouses or artificial environments and for some products shipping them in from the Southern hemisphere when they aren't available in the North, freezing products etc but those all add extra expenses.

I don’t think I would buy into British supermarkets on the basis of an increase in the World population, though maybe with the justification of the increase in the British population alone? Of course some years there will be shortages and high prices, such as eggs at present, but it just means people buy other stuff instead.

[ursaminortaur]

Demand for food is fairly constant though growing as the world population increases but supply isn't. Crop failures occur some years, plants are themselves seasonal as are animals eg lambing season. To some extent the seasonal nature can be overcome, extending the season by growing in greenhouses or artificial environments and for some products shipping them in from the Southern hemisphere when they aren't available in the North, freezing products etc but those all add extra expenses.

I don’t think I would buy into British supermarkets on the basis of an increase in the World population, though maybe with the justification of the increase in the British population alone? Of course some years there will be shortages and high prices, such as eggs at present, but it just means people buy other stuff instead.

The UK imports 46% of the food it consumes and hence has to compete with the demand from the world population for those imports.

https://ahdb.org.uk/news/food-security-in-the-uk

The key headline when talking about food security is self-sufficiency. Currently, the UK produces 60% of domestic food by value, part of which is exported as the UK imports 46% of the food it consumes.

Note. My comment was in response to the idea that supermarkets weren't cyclical rather than whether it was a good idea to invest in them. Personally I don't own any supermarket shares.

[GoSeigen]

They have the same amount of money regardless of whether it is spent on dividends or share buybacks. Emotive language regarding their choice, and non-literal burning of financial assets don't belong on a sensible board regardless.

It is nevertheless an interesting choice and they could have upped the dividend which is I guess what TJH is implying. I do not hold Tesco so I have no particular interest but to me it might suggest that they do not see any or much increase in profits over the next year or two (and they are thus avoiding maybe having to cut the dividend next year) Share buybacks on the other hand, by definition reduce the number of shares in issue and thus might make it a bit easier to at least maintain the dividend.

Funny how some investors don't like company own-share purchases and others don't like share issuance. Personally I don't mind either and am happy to participate in either if the price is right (which I think in most cases it is).

GS

[ursaminortaur]

It is nevertheless an interesting choice and they could have upped the dividend which is I guess what TJH is implying. I do not hold Tesco so I have no particular interest but to me it might suggest that they do not see any or much increase in profits over the next year or two (and they are thus avoiding maybe having to cut the dividend next year) Share buybacks on the other hand, by definition reduce the number of shares in issue and thus might make it a bit easier to at least maintain the dividend.

Funny how some investors don't like company own-share purchases and others don't like share issuance. Personally I don't mind either and am happy to participate in either if the price is right (which I think in most cases it is).

GS

The company has to have the money to make share buybacks which generally means they are done when the share price is fairly high meaning the company generally overpays. Rights issues are generally ok since as a shareholder you can evaluate what the money is being raised for ( is it being raised so that company can expand its operations in a way which will likely create future profits, or is it a desperate raising of cash to avoid a major problem ?) and decide whether to participate. Less welcome are placings which existing shareholders are excluded from but which dilute those shareholders.

[Dod101]

Funny how some investors don't like company own-share purchases and others don't like share issuance. Personally I don't mind either and am happy to participate in either if the price is right (which I think in most cases it is).

GS

The company has to have the money to make share buybacks which generally means they are done when the share price is fairly high meaning the company generally overpays. Rights issues are generally ok since as a shareholder you can evaluate what the money is being raised for ( is it being raised so that company can expand its operations in a way which will likely create future profits, or is it a desperate raising of cash to avoid a major problem ?) and decide whether to participate. Less welcome are placings which existing shareholders are excluded from but which dilute those shareholders.

I agree with all of that except that there is not much danger of say Tesco overpaying for buying back its own shares as they are usually fairly bombed out. The key though is to be buying at less than NAV.

Dod

[GoSeigen]

Funny how some investors don't like company own-share purchases and others don't like share issuance. Personally I don't mind either and am happy to participate in either if the price is right (which I think in most cases it is).

GS

The company has to have the money to make share buybacks which generally means they are done when the share price is fairly high meaning the company generally overpays.

Which is what I as a shareholder want.

Rights issues are generally ok since as a shareholder you can evaluate what the money is being raised for ( is it being raised so that company can expand its operations in a way which will likely create future profits, or is it a desperate raising of cash to avoid a major problem ?) and decide whether to participate. Less welcome are placings which existing shareholders are excluded from but which dilute those shareholders.

Nothing wrong with placings. I do mildly regret being unable to buy at a slight discount -- but simply buy in the market, the odd 3% doesn't make much difference in the scheme of things, especially if the placing is at a low price which it usually is.

GS

[GoSeigen]

The company has to have the money to make share buybacks which generally means they are done when the share price is fairly high meaning the company generally overpays. Rights issues are generally ok since as a shareholder you can evaluate what the money is being raised for ( is it being raised so that company can expand its operations in a way which will likely create future profits, or is it a desperate raising of cash to avoid a major problem ?) and decide whether to participate. Less welcome are placings which existing shareholders are excluded from but which dilute those shareholders.

I agree with all of that except that there is not much danger of say Tesco overpaying for buying back its own shares as they are usually fairly bombed out. The key though is to be buying at less than NAV.

Dod

No, I want my shares taken off me (speaking as a shareholder) at a high price thanks. That's the whole point of investing.

GS

[ursaminortaur]

I agree with all of that except that there is not much danger of say Tesco overpaying for buying back its own shares as they are usually fairly bombed out. The key though is to be buying at less than NAV.

Dod

No, I want my shares taken off me (speaking as a shareholder) at a high price thanks. That's the whole point of investing.

GS

The chances that the company is buying back shares at the particular moment you are selling and buys your shares is practically zero. The more likely outcome is that the company wastes money (which as one of the company owners is your money,) by overpaying for the shares it buys back.

[Dod101]

I agree with all of that except that there is not much danger of say Tesco overpaying for buying back its own shares as they are usually fairly bombed out. The key though is to be buying at less than NAV.

Dod

No, I want my shares taken off me (speaking as a shareholder) at a high price thanks. That's the whole point of investing.

GS

Yes of course, who doesn't? But a share buyback does not 'take shares off you' as you well know. It is not even a tender offer where you can offer your shares at that price. When a share buyback is undertaken it does not automatically increase the price of the share in the market. But you must know all this so why are you making such a statement?

As an ongoing shareholder, no one wants to see the Company buying back its own shares for a price more than NAV, preferably at a low point as that helps continuing shareholders, and incidentally leaves fewer mouths which the dividend needs to feed.

Dod

[GoSeigen]

No, I want my shares taken off me (speaking as a shareholder) at a high price thanks. That's the whole point of investing.

GS

The chances that the company is buying back shares at the particular moment you are selling and buys your shares is practically zero. The more likely outcome is that the company wastes money (which as one of the company owners is your money,) by overpaying for the shares it buys back.

But the chances of my selling some shares when the company is buying them is practically 100%, if I so choose.

IMO it's not a waste of money. It's the raison d'etre of companies. They issue shares cheap to investors, then return cash either through dividends or otherwise when they have achieved success -- and consequently their share price is high.

However, I know that PI conventional wisdom is the opposite of this, you don't need to continue pointing it out to me. If other investors wish to have lower blood pressure AND investing success then hopefully this is a novel and useful way to think about corporate capital.


GS

[GoSeigen]

No, I want my shares taken off me (speaking as a shareholder) at a high price thanks. That's the whole point of investing.

GS

Yes of course, who doesn't? But a share buyback does not 'take shares off you' as you well know.

You didn't read or understand the entirety of what I wrote. I said "speaking as a shareholder" i.e. not as an individual but as a representative of the class of shareholders. It is to the benefit of the shareholders if their shares are bought off them at a high price, let's say much higher than their issue price, than at a low price, e.g. below issue price. I cannot see how that is in any way controversial, but that is just me...

It is not even a tender offer where you can offer your shares at that price. When a share buyback is undertaken it does not automatically increase the price of the share in the market. But you must know all this so why are you making such a statement?

As an ongoing shareholder, no one wants to see the Company buying back its own shares for a price more than NAV, preferably at a low point as that helps continuing shareholders, and incidentally leaves fewer mouths which the dividend needs to feed.

Dod

Then why be an ongoing shareholder? Do what is flippin' logical and reduce your exposure when the liquidity is offered, ESPECIALLY if you don't agree with the activity in principal. The logic here is impeccable IMO. Don't be an ongoing shareholder if you don't like the effect of the company's policy on your future investment. It really is that simple.

GS

[Dod101]

Yes of course, who doesn't? But a share buyback does not 'take shares off you' as you well know.

You didn't read or understand the entirety of what I wrote. I said "speaking as a shareholder" i.e. not as an individual but as a representative of the class of shareholders. It is to the benefit of the shareholders if their shares are bought off them at a high price, let's say much higher than their issue price, than at a low price, e.g. below issue price. I cannot see how that is in any way controversial, but that is just me...

It is not even a tender offer where you can offer your shares at that price. When a share buyback is undertaken it does not automatically increase the price of the share in the market. But you must know all this so why are you making such a statement?

As an ongoing shareholder, no one wants to see the Company buying back its own shares for a price more than NAV, preferably at a low point as that helps continuing shareholders, and incidentally leaves fewer mouths which the dividend needs to feed.

Dod

Then why be an ongoing shareholder? Do what is flippin' logical and reduce your exposure when the liquidity is offered, ESPECIALLY if you don't agree with the activity in principal. The logic here is impeccable IMO. Don't be an ongoing shareholder if you don't like the effect of the company's policy on your future investment. It really is that simple.

GS

I am afraid that I do not understand your statements do I think we had better leave it here since it is at best peripheral to Supermarket troubles.

Dod

[Hallucigenia]

But in theory, large integrated OilCo's should not fluctuate so much with the oil price. When World oil prices are low, they make their profits downstream.
Supermarkets should also not be cyclical businesses, as demand for food is fairly constant.

That's the theory, but the reality is that oil company profits vary a lot - either because they are not perfectly hedged internally (these days most have a lot of gas), or Mr Market does things differently to theory. For instance last year we had high oil prices and record European refining margins thanks to Putin. And then you have oops like Deepwater Horizon. So this is what BP's recent gross profit history looks like - so much for theory. You can see why they are fans of using buyback to smooth returns to shareholders.

[Dod101]

What has this to do with supermarkets?

Dod

[vand]

For those who just assumed Amazon would find this supermarket gig a breeze:

https://www.msn.com/en-gb/money/other/a ... 08fc&ei=13

Like I said, they have to swim in the same waters as everyone else, and they don't necessarily have any competitive advantage in the space.