Shares are already leveraged

[Value Collector]

Debt financing, like everything else, is reasonable and acceptable if the business does not depend on it to survive. So if the business is capital intensive but its income and cash streams are stable and predictable... and if it can borrow for at or below its rate of return etc., then of course it should use other people's cheap bargain.

APA's weighted interest rate is 5.56%, and their debt long dated, Some of it is 60 year bonds, that don't mature until the year 2072.

Yes, the year 2072, that means I am 36 years old Today and the Notes don't expire until after I turn 90.

Hell, with bonds with that type of expiry, its just as stable as share holders equity.

They have no issue with their debt, and all infrastructure they have bought or developed earns much higher rate than the 5.56% interest they pay, and they have heaps of operating cashflow.

the only reason they have done capital raising is to expand, they pay pretty decent dividends, so to take advantage of growth opportunities they have brought in fresh capital rather than cut dividends, but share holders equity is less than $3.90 per share, so a capital raising at $8 is good for exisiting share holders.

 

[luutzu]

Nope, Just a well managed and well financed company holding cash generating assets critical to the Australian economy.



How is that misleading? Total share holder returns are a function of share price and dividends, are hey not?

It's a pretty standard calculation, to show the performance of a company or index had you held the investment over a given time and reinvested all the dividends etc.

Commsec calculates if for you for any company.

Well financed that's for sure. And lucky too. But the takeover will either be blocked or the Chinese will walk away once they take a closer look.

Share price gains can be due to many reasons. One of them being momentum. If a company get higher enough on that Index, money is going to pour into it. If it manages to use that high position and market sentiment, raise more cash... the bank will lend more due to higher equity... then its asset value increase; market price on a "stable" dividend paying giant should at least be priced at asset value... acording to some thinkers... so its share price goes up. Then on and on until it either come crashing down or some rich idiot with a grand strategy come on over with pallets of cash.

From memory, I don't think APA's net operating cash or profit was big enough to pay its interests and dividends.

When a company cannot pay both, one of them have to be cut. Can't cut back on the lenders... and here, they didn't cut on the shareholders either. Sooo.... raise and borrow for "growth".

 

[Value Collector]

Well financed that's for sure. And lucky too. But the takeover will either be blocked or the Chinese will walk away once they take a closer look.

I actually hope they get denied, I don't want to sell

Share price gains can be due to many reasons. One of them being momentum. If a company get higher enough on that Index, money is going to pour into it.

The share price has risen as the dividend has increased, the equity has increased, and the company has gone from operating a few isolated point to point pipelines to develop an interconnected grid/web of pipelines that link every market on the east coast, as well as a bunch of other investments.

From memory, I don't think APA's net operating cash or profit was big enough to pay its interests and dividends.

You are just plan wrong on that one,

last year, they had $ 1,470 Million of EBITDA,

They only had interest costs of $513 Million, leaving operating cashflow of more than $950 Million from which they paid $501 Million in dividends.

When a company cannot pay both, one of them have to be cut. Can't cut back on the lenders... and here, they didn't cut on the shareholders either. Sooo.... raise and borrow for "growth".

They can easily pay Both interest and dividends from EBITDA, and still have over $400 Million per year to clear debt if they decided they didn't want to grow anymore, and $400 Million per year would be more than enough to clear the debt as it matured.

if they cut the dividend they would have over $900 Million of cashflow per year to clear debt with.

You need to look at the numbers again, it sounds like you mis read something some where.

 

[luutzu]

I actually hope they get denied, I don't want to sell


The share price has risen as the dividend has increased, the equity has increased, and the company has gone from operating a few isolated point to point pipelines to develop an interconnected grid/web of pipelines that link every market on the east coast, as well as a bunch of other investments.



You are just plan wrong on that one,

last year, they had $ 1,470 Million of EBITDA,

They only had interest costs of $513 Million, leaving operating cashflow of more than $950 Million from which they paid $501 Million in dividends.



They can easily pay Both interest and dividends from EBITDA, and still have over $400 Million per year to clear debt if they decided they didn't want to grow anymore, and $400 Million per year would be more than enough to clear the debt as it matured.

if they cut the dividend they would have over $900 Million of cashflow per year to clear debt with.

You need to look at the numbers again, it sounds like you mis read something some where.

Enron was pretty widespread and held a lot of important and strategic stuff too.

But alright, I'll take another look later just to prove you wrong.


Didn't Buffett say that EBITDA is funny accounting where management assumes there's no Interest, Tax or Depreciation? Just that in the real world, there are all those things?

 

[Value Collector]

Didn't Buffett say that EBITDA is funny accounting where management assumes there's no Interest, Tax or Depreciation?

Yeah, But you just have to be aware of the D & A part of it, which for APA I understand well and they are minimal. (True D & A anyway, they do get some accelerated Deprecation for tax purposes)

But alright, I'll take another look later just to prove you wrong.

I will just let APA, prove you wrong over the next 10 years (another reason I don't want the take over to succeed haha)

I am not a nit wit, I understand a thing or two about companies and finance, and I have spent 18 years watching and learning about everything APA has been doing, So in situations like this I tend to do better by backing my own judgment, So to be honest will be ending the discussion on APA with you Here.

 

[gaius]

Most companies have debt that they use to grow their business faster than if they had to save up the cash. So essentially, when you're buying shares, you're mostly buying an already leveraged asset. If you then take out a LOC or margin loan, you're leveraging and already leveraged asset.

Does anyone else think about it from this point of view?

That's the point, isn't it. That's exactly where the profit is coming from - Leverage! What's the point of issuing shares if not for leverage? What's the point of investing in shares if not for leverage? This is exactly how money had been made - borrow and buy, borrow more and buy more.

 

[Zaxon]

That's the point, isn't it. That's exactly where the profit is coming from - Leverage! What's the point of issuing shares if not for leverage? What's the point of investing in shares if not for leverage? This is exactly how money had been made - borrow and buy, borrow more and buy more.

True. But in a down market, too much leverage can wipe you out. And if you're taking out a margin loan on a company that already is internally geared, you could argue that this just compounds the problem.

 

[galumay]

Take a look at APA..

Thanks VC, I am sure its a great business that I have missed because of my dislike of debt and leverage. Well done for unpicking the business and understanding it well enough to make a great investment.

 

[gaius]

True. But in a down market, too much leverage can wipe you out. And if you're taking out a margin loan on a company that already is internally geared, you could argue that this just compounds the problem.

There won't be a down market. It is a problem that will never happen. Not even a global trade war could stop ASX from rising to fresh 10-year high. There are so much money in the system that people simply can't stop buying.

 

[galumay]

It is a problem that will never happen.

So its "different this time"?

 

[gaius]

So its "different this time"?

Let's say I wouldn't lose any sleep worry about if the next ice age would come tomorrow.

The market could go down 1% or 2% now and then, 10% at most. Believe it or not, people will rush back in before 10% correction. The fact is, no one really believe that there is any genuine reason for a significant downturn. Those who think the market will go down are really just looking for buy opportunity. They are all buyers on the side. How could there possibly be a down market?

 

[luutzu]

Yeah, But you just have to be aware of the D & A part of it, which for APA I understand well and they are minimal. (True D & A anyway, they do get some accelerated Deprecation for tax purposes)


I will just let APA, prove you wrong over the next 10 years (another reason I don't want the take over to succeed haha)

I am not a nit wit, I understand a thing or two about companies and finance, and I have spent 18 years watching and learning about everything APA has been doing, So in situations like this I tend to do better by backing my own judgment, So to be honest will be ending the discussion on APA with you Here.

I know you're quite a capable guy. Just no one's perfect. And it's silly to fault an investment decision that had return so well all these years... or is it?

But of course man, always stick to your judgement.

 

[galumay]

How could there possibly be a down market?

Is that a serious question?!

I guess this is the consequence of a generation who as investors have never seen a market crash. Trust me, know one sees it coming and its never caused by what people are expecting.

 

[gaius]

Is that a serious question?!

I guess this is the consequence of a generation who as investors have never seen a market crash. Trust me, know one sees it coming and its never caused by what people are expecting.

Seriously, global trade war barely moved ASX200, I'm sure the market is waiting for a jump.

 

[galumay]

*Sigh* *whack*

 

[Value Hunter]

I think with leverage (and risk taking in general) it should depend partly on your age and financial situation. I think most young people should take on some investment related debt while they try to establish an asset base, given how high cost of living and house prices is these days and how low wages growth is, its really the only way to get ahead for many young people. Then once their asset base starts to slowly build up they can gradually deleverage over time.

I have taken this approach myself. I started off with very high levels of investment related debts and have gradually brought down my gearing ratio over a number of years through injecting more of my own cash into new investments and through the growth of existing investments (without taking on any additional borrowings). In the coming year I will sell some assets at an overall profit to further reduce my gearing levels.

Ideally retired people should have zero debts or at least that is my thinking.

 

[ducati916]

I actually hope they get denied, I don't want to sell


The share price has risen as the dividend has increased, the equity has increased, and the company has gone from operating a few isolated point to point pipelines to develop an interconnected grid/web of pipelines that link every market on the east coast, as well as a bunch of other investments.



You are just plan wrong on that one,

last year, they had $ 1,470 Million of EBITDA,

They only had interest costs of $513 Million, leaving operating cashflow of more than $950 Million from which they paid $501 Million in dividends.



They can easily pay Both interest and dividends from EBITDA, and still have over $400 Million per year to clear debt if they decided they didn't want to grow anymore, and $400 Million per year would be more than enough to clear the debt as it matured.

if they cut the dividend they would have over $900 Million of cashflow per year to clear debt with.

You need to look at the numbers again, it sounds like you mis read something some where.

So the post above is about 8 months ago.

The 2019 financials for APA disclose:

Working capital needs to be financed. (Current Assets < Current Liabilities); and
Financing is required to meet expenses of Interest, CapEx and Dividends (combined costs).

They (Company) also seem to be making a push (expansion) into US (Houston).

Raises (some) questions.

jog on
duc