I GUESS that with its index at a shade under 74, about 26% down from its initial index of 100 in August 2007, the Private Portfolio is bruised but in fair health. Its cash holding is close to R4500, and we may well convert this cash into shares in the near future.
Jean and I continue to trawl the waters in the market for a possible prize catch, perhaps more shares of a company already held.
We’re now looking at companies with sustainable, growing dividend yields.
(BAT) is one of these. At its share price of R230, its historic earnings yield is 7,55% and its dividend yield is 3,83%. Many of its markets are flourishing. The global economic crisis could spur demand for more addiction.
We won’t buy the shares, however, because we don’t like the tobacco business.
Relative to my fear that will be in a takeover battle, I can’t resist telling you something about BAT in the role of a “white knight”.
In the 1980s, the German insurance giant Allianz coveted the London-listed Eagle Star, one of whose subsidiaries was SA Eagle, now Zurich Insurance Company SA. For some years, before starting my own business, I had been an executive of SA Eagle. In 1986, I was offered the position as marketing director of Eagle Star’s offshore life insurance company based in the Isle of Man.
There I found, to my dismay, that BAT was the controlling company of Eagle Star. I had been so focused on the domestic market that I had missed the costly battle against Allianz. To win the battle and be free from the clutches of a larger competitor, Eagle Star had been grabbed by a death-dealing tobacco merchant. Could there have been a less suitable owner for a company that wanted its life insurance policyholders not to be lured into smoking tobacco?
The tobacco business is, comparative to life insurance, simple. You find a growing market for potential addicts, build a factory, make cigarettes, and the cash flows and flows. Building an insurance business, especially a life insurance business, requires capital and patience. It can often take years before profits emerge.
The last thing a tobacco company wants is to wait years for life insurance profits to emerge and have to back up the promise with additional capital. It also doesn’t enjoy the cyclical fortunes of short-term insurance business.
In the 1990s, the infant Eagle Star life company in Holland, which I then headed, was growing so rapidly that it was cash- starved. No go. My BAT boss ignored the investment fundamentals of my company. He wanted cash profits now, not some time in the future. I was lucky and helped to sell my company to a group at a siz able capital profit — but only because Eagle Star itself wanted more cash for expansion elsewhere.
Inevitably, the unholy alliance with the “white knight” ended when Eagle Star’s larger rival, Zurich, bought the UK company from BAT. This ironic consequence says nothing about the years of pain and misery endured by Eagle Star’s management in trying to pursue a business strategy directly in conflict to that of the tobacco business.