The well-rea­soned BAT blun­der

Finweek English Edition - - Insight -

“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.

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