CCP - Credit Corp Group

[Value Hunter]

Galumay the U.S.A. is actually no better than Australia in that regards except that share buybacks to some extent replace dividends in the equation.

When U.S. based companies have record corporate earnings and are flush with cash they do multi billion dollar share buybacks at record high share prices. Then when there is a recession, earnings drop and their balance sheets need to be shored up due to being over-leveraged (partly due to all the borrowed money used for stock buybacks) they then do capital raisings (share issues) and issue shares at much lower prices than they previously bought back shares thus destroying billions of value in the process. This happens like clock work. Share buybacks should be done only when the shares are undervalued not because a company has excess cash. Unfortunately corporate share buyback volumes tend to hit record highs as share prices make new record highs. Since the global financial crises in the U.S. something like half of all share purchases in the U.S.A. have been companies buying back their own stock.

Sptrawler as Berkshire Hathaway has proved you do not need to pay dividends. You can retain all earnings and shareholders can sell some shares if they need cash flow. There can admittedly be problems with this approach when there is a market downturn but overall it can be a worthwhile (and in some cases superior) strategy on a through the cycle basis.

Investoboy I have seen all the type of research you are speaking of but I think it confuses cause and effect. Companies that pay large and increasing dividends often are able to do so because they are highly profitable and mature cash cows which generate vast excess cash flow, whereas often the earlier stage and more speculative companies are the ones that retain more earnings. Therefore I would make the assertion that the research has it back to front and that higher quality businesses generally are able to pay increasing dividends rather than increasing dividends causing a company to generate higher returns through more stringent capital allocation. That topic is potentially a long and complicated discussion which could warrant its own thread though. Also I would say CCP is not an outlier and a large percentage of ASX listed companies have a similar story to tell if you delve into the numbers. And its not about hindsight I was questioning Credit Corps directors years ago about their irrational dividend policy.

 

[sptrawler]

Sptrawler as Berkshire Hathaway has proved you do not need to pay dividends. You can retain all earnings and shareholders can sell some shares if they need cash flow. There can admittedly be problems with this approach when there is a market downturn but overall it can be a worthwhile (and in some cases superior) strategy on a through the cycle basis.

That is true, but constantly relying on capital gains and selling the underlying asset to live on, I feel would be a much more stressful way to run your retirement portfolio.

At the moment having to sell shares for income would be quite stressfull, but in retirement for some there will be no other option, that is untill they become eligible for Government assistance.
With a dividend flow of say 4%, it gives a degree of certainty in planning, hoping for a 4% compounding growth in a share price is nice but hard to imagine with the hickups in the market.
Dividend is a function of earnings and payout ratio, price growth even with retained earnings, is a function of earnings being deployed into growth vehicles and prevailing market sentiment at the time. If no growth opportunities present it sits on the books as a taxable liability and the share price stays stagnant. Well that's my basic understanding.

How much retained earnings, has been lost over the years, trying to buy further growth overseas in the past? Apart from a couple of ventures, all that has happened in my memory, has been billions of shareholder value gone up in smoke.
Nab(U.S and U.K foray), Telstra(Asia), Westfarmers (U.K), ANZ (Asia) AMP(everywhere) to mention a few.

That might be fine while you are earning an income and investing for future needs, you have the income and time to recover, but when you are solely dependent on investment earnings for your lively hood, breaking the profits into dividends and growth is appealing.
Just my opinion.

 

[galumay]

I tend to the view that dividends should be the last resort of capital allocation, in the first instance the greatest value is created by the business that can compound returns on incrementally invested capital, so ideally you want all the FCF to be used to grow the business. If they cant compound the returns at an attractive rate then the next best value is likely share buybacks - as VH points out, these need to be done when price is below intrinsic value. Finally if there are no better options, then paying it as a dividend is last resort.

 

[sptrawler]

I tend to the view that dividends should be the last resort of capital allocation, in the first instance the greatest value is created by the business that can compound returns on incrementally invested capital, so ideally you want all the FCF to be used to grow the business. If they cant compound the returns at an attractive rate then the next best value is likely share buybacks - as VH points out, these need to be done when price is below intrinsic value. Finally if there are no better options, then paying it as a dividend is last resort.

I understand the sentiment, but as I've said with Australia being such a small market place growth opportunities are somewhat limited, that usually means companies have to look further afield for growth opportunities. As I said, that hasn't been very successful in the past, but the idea is great IMO.
Westfarmers is sitting on a war chest ATM, it will be interesting to see how they deploy it.
Anyway just my opinion and I am talking from a subjective point of view, so I will obviously be biased.

 

[galumay]

Agreed, its tougher here, which presumably is one of the reasons divvies are more popular. Also right about many companies attempts to expand offshore, few have cracked it.

I dont really think you situation makes you biased, you have articulated why divvies are preferable for you. Many investors would share the sentiment. I still think VH raises a valid point with CCP, that also applies to some others, if the divvies have effectively been financed with equity raising, thats poor capital allocation. Any increase in share holder value has probably only come from multiple expansion - which might be part of the reason it has been so hard hit.

Interesting discussion, both about CCP and the wider issues.

 

[sptrawler]

Interesting discussion, both about CCP and the wider issues.

Very much so, it is great we can all canvas the issues from many angles, it makes the discussion helpful to readers at all stages of their financial journey.
IB, VH and yourself give a great deal of insight, that I hadn't considered and I certainly appreciate it.
Wish ASF had been around when I was a young bloke, starting the journey, rather than finding it when I have entered the departure lounge.

 

[InsvestoBoy]

I tend to the view that dividends should be the last resort of capital allocation, in the first instance the greatest value is created by the business that can compound returns on incrementally invested capital, so ideally you want all the FCF to be used to grow the business. If they cant compound the returns at an attractive rate then the next best value is likely share buybacks - as VH points out, these need to be done when price is below intrinsic value. Finally if there are no better options, then paying it as a dividend is last resort.

If there is one thing that management teams as a cohort are worse at than allocating retained earnings to growth, it's timing share buybacks.

If there is contention about what an "ideal" management team should do, it's one thing, but I am just talking about the reality of the situation given decades of data globally. Most management teams are far from ideal, and I don't necessarily blame them, it's much harder to run a business than prognosticate about it.

I don't agree that growing the business should be the number one goal of every business and I personally think this is usually the downfall of many businesses that would otherwise have been sustainable and ongoing outfits.

Question for @galumay and @Value Hunter, let's say you are the owner of a successful suburban kebab shop. You're happy with the customer base of punters from the pub next door and it throws off about 5% a year in net profits. What do you do with those profits? Do you sit on those profits for 5 years, knowing that running a kebab shop is capital intensive and that you'll need a new fryer and updated fittings? Do you use the profits to buy a new fryer so you can run 24/7 and service truckies as they drive by?

Is there literally no scenario where you simply take those profits and spend them on your home mortgage and family expenses, go to the bank every 5 years for a new loan for the fryer and just sit and stay happy with the business as is without feeling some primordial capitalist urge to become a nationwide chain of kebab shops?

 

[sptrawler]

If there is one thing that management teams as a cohort are worse at than allocating retained earnings to growth, it's timing share buybacks.

If there is contention about what an "ideal" management team should do, it's one thing, but I am just talking about the reality of the situation given decades of data globally. Most management teams are far from ideal, and I don't necessarily blame them, it's much harder to run a business than prognosticate about it.

I don't agree that growing the business should be the number one goal of every business and I personally think this is usually the downfall of many businesses that would otherwise have been sustainable and ongoing outfits.

Question for @galumay and @Value Hunter, let's say you are the owner of a successful suburban kebab shop. You're happy with the customer base of punters from the pub next door and it throws off about 5% a year in net profits. What do you do with those profits? Do you sit on those profits for 5 years, knowing that running a kebab shop is capital intensive and that you'll need a new fryer and updated fittings? Do you use the profits to buy a new fryer so you can run 24/7 and service truckies as they drive by?

Is there literally no scenario where you simply take those profits and spend them on your home mortgage and family expenses, go to the bank every 5 years for a new loan for the fryer and just sit and stay happy with the business as is without feeling some primordial capitalist urge to become a nationwide chain of kebab shops?

On that very issue IB, I was talking to a friend of mine who with a partner run a small building company, he said they make the same money when they turn over $1m as they did when they turn over $3m, it is just a lot less work and stress turning over $1m.
Don't know how accurate his figures were, but he had no reason to BS and I had no reason not to believe him.

 

[galumay]

Question for @galumay and @Value Hunter, let's say you are the owner of a successful suburban kebab shop....

Its a terrible analogy. If I wanted that sort of return I would buy a kebab shop. In fact the company I run takes that to the next step, the entire purpose of the companies operations are to provide me with the lifestyle I want to live, currently that means working very few hours a week, creating no financial return other than the advantages of running a company for a lot of expenses and tax benefits. I specifically dont try to grow the business.

I also have an IP that returns over 5% net rental returns, I am also happy to sit on that and collect the income without it growing.

Investing in public companies is an entirely different pursuit, my search is for businesses that can compound returns on incrementally invested capital and thereby deliver much higher returns than the other activities I practice. I have no interest in investing in a public company with 0% growth and paying out a 5% dividend, i can do that elsewhere with less risk.

 

[Knobby22]

I get the analogy though, even if it is a bit rough. So many companies retain a lot of cash to enable growth and just blow it.

 

[Value Hunter]

Knobby what you are saying is true a lot of companies blow the cash.

All I am saying is that certain types of companies like Telstra, Wesfarmers, etc should pay generous dividends and certain other types of companies like Credit Corp, CSL, Seek, Cochlear, etc should not pay dividends. Companies should pay dividends either because they have a low return on equity or because growth opportunities are limited due to them operating in a mature market, etc.

Companies should not pay dividends merely for the sake of paying dividends or because it is the default option.

 

[Knobby22]

Knobby what you are saying is true a lot of companies blow the cash.

All I am saying is that certain types of companies like Telstra, Wesfarmers, etc should pay generous dividends and certain other types of companies like Credit Corp, CSL, Seek, Cochlear, etc should not pay dividends. Companies should pay dividends either because they have a low return on equity or because growth opportunities are limited due to them operating in a mature market, etc.

Companies should not pay dividends merely for the sake of paying dividends or because it is the default option.

I half agree Value Hunter.

Companies like CSL as you mention should pay a dividend that is small percentage of profits and ideally it should rise each year with growth. It concentrates management minds and sets targets such as cash flow. It also is good to give some reward to long term holders.

I do agree CCP has been paying a too high percentage of profits. Getting the balance right can be difficult.

Another company Transurban has been paying dividends but is likely to now stop to take advantage of the present crisis to gain bargains.

FMG could spend all the massive dividend on new mines but this is risky. Investors like getting rewarded with less risk.

 

[JTLP]

Price is currently 34% above offer price of $12.50. Looking very attractive now. Will be tipping in a few K to get the new shares. Anticipating it’ll get scaled back massively.

 

[TDinvestor]

Hi Guys, I am a new investor. Is CCP a good buy now @16.5?
Can it be a growing stock?

 

[galumay]

Welcome to ASF, TDInvestor.

We can't tell you whether its a good buy at $16.50 for 2 reasons, its illegal to give investment advice on a public forum and no one knows the answer to your question anyway.

It can be a growing business, its been one for the last 10 years at a CCGR of over 10%, so I would think its quite possible it will continue to be.

As to working out the value of CCP and deciding whether the current price represents a discount to its value, thats something you need to work out for yourself - its important to work things like valuations out for yourself, otherwise you will just be gambling and have no conviction in your investment decisions.

 

[Knobby22]

Welcome to ASF, TDInvestor.

We can't tell you whether its a good buy at $16.50 for 2 reasons, its illegal to give investment advice on a public forum and no one knows the answer to your question anyway.

It can be a growing business, its been one for the last 10 years at a CCGR of over 10%, so I would think its quite possible it will continue to be.

As to working out the value of CCP and deciding whether the current price represents a discount to its value, thats something you need to work out for yourself - its important to work things like valuations out for yourself, otherwise you will just be gambling and have no conviction in your investment decisions.

Yes, I don't know as I am unsure how deep the recession will be and how that will affect the buying of the loans and returns. Also what the losses will be short term. Management is good though. Don't own at present.

 

[JTLP]

Hi Guys, I am a new investor. Is CCP a good buy now @16.5?
Can it be a growing stock?

It’s been answered by 2 respected members, so hope that helps.

IMO apart from that glitch where they got crushed, they’ve been very conservative in their profit announcements and seem to be a well oiled machine.

 

[peter2]

This is a strongly bullish chart. IMHO price looks like going back to the pre-COVID high ($38) as an initial target.

The chart failed to upload "because the file could not be written to the server. The site administrator will need to resolve this before any files can be uploaded. "

I'll post the chart later.

 

[Miner]

This is a strongly bullish chart. IMHO price looks like going back to the pre-COVID high ($38) as an initial target.

The chart failed to upload "because the file could not be written to the server. The site administrator will need to resolve this before any files can be uploaded. "

I'll post the chart later.

Greetings Pete
Watching the trade history and chart for CCP I noticed during COVID - March 2020 the price of CCP was around $5.7 compared today's closing price of $30.8.
If your analysis says the price looks like going back to pre COVID high $38 (about) is good for today's buyer but also shows the people who bought March - June are in box seat.

.

 

[galumay]

It was a great opportunity to top up when it got smashed in March. Anyone with more than a passing knowledge of the fundamentals of the business and the quality of management would have been very comfortable adding at that time. I was distracted by my search for great opportunities outside of my portfolio in March - and missed one of the biggest right in front of me!