No. of Recommendations: 34
FWD PE 18 shrinking margins, higher debt service, should perhaps cut dividend to focus on debt service. $12 EPS by 26/27?
https://youtu.be/MlKDkOckm0c?si=kKg-RAntEmlfau43 Certainly more rational thinking than you usually see.
But I think his model for the next few years would be improved by making it more internally self consistent.
I did not delve into it that clearly, as the spreadsheets flow buy quickly in the video, but it seemed to me that---
* He assumes a very slow rate of growth of stores, maybe 40-45% of the usual rate, but does not touch on where the freed-up money will go. He doesn't allocate it to debt reduction, the expense of which he holds constant at a new higher rate. I think expansion capex is around $750m/year from memory.
* For his terminal value, he knocks off the debt and looks at the earnings in relation to the remainder, but does not adjust the earnings for the $400m/year in interest charges saved if that debt were paid off.
You either get the benefits and expenses of having debt, or neither. There is no planned liquidation of the firm that would require paying it off, so this is an EPV valuation not a net asset valuation.
Though I am not a dividend seeker, I really don't get where he's coming from on suggesting that the dividend needs to be cut.
I think the great majority of shareholders would be better off if that money were used for buybacks, but it certainly doesn't seem to be in peril.
The payout ratio is around 1/3 during a cyclical dip in earnings, and maybe 25% of cyclically adjusted earnings. Tons of firms aim at 50%, many higher.
I think the dividend exists not as a goal to attract more investors but more as a "what else are we going to do with all that money rolling in".
It's a whole lot of work to open 1000 stores a year in an intelligent manner, so more expansion capex probably isn't viable, and historically the valuation multiples were usually pretty high so buybacks weren't a slam dunk choice.
Jim
