The well-reasoned BAT blunder
“YOUNG MAN, never sell Rembrandt shares.” That was a direct instruction hurled at me without any further explanation or sympathy 40 years ago after I had the audacity to convert a client’s nice parcel of Rembrandt shares into Russells, a furniture retailer that at the time gave the investor a far better dividend yield than the very meagre one paid by Rembrandt. For the rest of my career as a stockbroker that was an instruction never again negotiable.
Almost like Churchill, the late Harry Laurie, former Sanlam investment head and later a regular columnist in Finansies & Tegniek, a forerunner of Finweek, often repeated his simple rule. “Over many decades, many investment advisers regularly converted many Rembrandt shares to other shares that paid a much higher dividend. Each time the advisers were wrong.”
With the unbundling of British American Tobacco (JSE code BTI) last week – and like many an investment adviser – I again fell into the same trap. In October/November last year, BAT – which had just been listed on the JSE on its own – for obvious reasons looked a better investment than Remgro (JSE REN) and Richemont (CFR).
At year-end 2008 things were still dark. It looked as if the financial world was going to perish. Without BAT, Remgro’s newest, most important investment was its interest in RMBH/FirstRand and things weren’t going at all well there. Remgro also suddenly lost its status as a rand hedge. That was transferred with BAT to its shareholders. In fact, Remgro’s remaining portfolio looked bleak – and that’s what I reported.
Almost the same applied to Richemont. Without BAT, the specialist in luxury goods had to rely on its own business for profit and especially cash flow. Late last year, things weren’t going well for rich people. What they didn’t lose in value on investments, the fraudster Madoff took. It also looked as if Wall Street’s bankers would never receive a bonus again – and without those bonuses there wouldn’t be much of a demand for expensive watches. And, as usual, Richemont executive chairman Johann Rupert was outspokenly negative about the world’s economic prospects.
My thinking was simple: BAT’s dividend was much higher and also much safer than Richemont’s. Both were rand hedges – after all, both earn nearly all their income outside SA. Without BAT, Richemont looked dangerous and flimsy.
The logical recommendation (unfortunately, I sometimes follow my own advice) was to sell the unbundled Remgro and Richemont and to buy more BAT. If you believe the Rupert flair hasn’t burned out yet, the route would be out of Remgro and Richemont to Reinet.
It’s now 12 months later. The graph tells you clearly: “You never sell Rembrandt (now Remgro and Richemont).” But BAT is undoubtedly a far better investment than Russells, now a subsidiary of JD Group.