"...the discretion by the board to declare a dividend has almost become a de facto obligation in reality. When dividend payment becomes an obligation instead of a discretion, from the company’s point of view, its 2.236 billion shares outstanding behaves more like a perpetual bond rather than common equity."
That is a reasonable framing in the abstract. However, I remain quite conservative in assuming any further effort on the share repurchase front. While the dividend can be viewed as a de facto obligation, the equity is will always be at the end of the capital stack. Debt will (and should) be prioritized, just as the company has rightly done. Conversely, if the rest of the business continues to grow the denominator of the leverage ratio calc (enterprise earnings), leverage has room to come down naturally even without a continued fixation on retiring debt over rolling it.
Thanks for the thought provoking analysis. If a Canada settlement ends up well in excess of the ringfenced cash is there any option to liquidate ITCAN and establish a new Canadian subsidiary rather than bailing it out?
If it is a viable option, then BAT would have settled the litigation already instead of having GBP2.4bn restricted cash in Canada, which has accumulated since the CCAA process commenced in 2019. If BAT were to liquidate ITCAN and establish a new Canadian subsidiary, then it is unlikely that the new Canadian subsidiary can continue to sell cigarette, e-cigarette or other products that involve legacy trademark or intangible assets that still stay within ITCAN.
Of course another option is to simply liquidate ITCAN for good and let go of the Canada business, which is the base case assumed by credit rating agencies and maybe even BAT.
Good piece.
"...the discretion by the board to declare a dividend has almost become a de facto obligation in reality. When dividend payment becomes an obligation instead of a discretion, from the company’s point of view, its 2.236 billion shares outstanding behaves more like a perpetual bond rather than common equity."
That is a reasonable framing in the abstract. However, I remain quite conservative in assuming any further effort on the share repurchase front. While the dividend can be viewed as a de facto obligation, the equity is will always be at the end of the capital stack. Debt will (and should) be prioritized, just as the company has rightly done. Conversely, if the rest of the business continues to grow the denominator of the leverage ratio calc (enterprise earnings), leverage has room to come down naturally even without a continued fixation on retiring debt over rolling it.
Excellent write-up!
Thanks for the thought provoking analysis. If a Canada settlement ends up well in excess of the ringfenced cash is there any option to liquidate ITCAN and establish a new Canadian subsidiary rather than bailing it out?
If it is a viable option, then BAT would have settled the litigation already instead of having GBP2.4bn restricted cash in Canada, which has accumulated since the CCAA process commenced in 2019. If BAT were to liquidate ITCAN and establish a new Canadian subsidiary, then it is unlikely that the new Canadian subsidiary can continue to sell cigarette, e-cigarette or other products that involve legacy trademark or intangible assets that still stay within ITCAN.
Of course another option is to simply liquidate ITCAN for good and let go of the Canada business, which is the base case assumed by credit rating agencies and maybe even BAT.