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The budget deficit

Why does the Caxton and CTP Publishers and Printers Group keep cash of R1.7 billion when it is not a Berkshire Hathaway?

In yesterday's article we mentioned how Berkshire Hathaway is keeping cash on hand of $120 billion and waiting for the right opportunity to invest.

Berkshire Hathaway has various interests in a wide variety of companies including Coca-cola, American Express and Apple.

Caxton is not a Berkshire Hathaway and to a large extent, only keeps its investments around media and print businesses.


This article is an attempt to explain the company's significant cash holdings.


On the face of it all

The Caxton and CTP Publishers and Printers Group balance sheet looks very healthy.

A cash pile of R897 million,

another R800 million held in preference shares generating 6% dividends,

no long term debt other than the deferred tax, and

the current liabilities are sufficiently covered by current assets.


For the 12 months ended 30 June 2019 the group generated cash of R166 million after subtracting capital expenditure of R187.34 million from the cash generated from operations of R353.56 million.

Considering that operations are cash-profitable;
The Group does appear to be holding excessive amounts of cash and equivalent assets on hand .

As at 30 June 2019:

The company had R897 million in cash and another R800 million in preference shares earning dividends of 6%.


If you find yourself thinking that the company should perhaps return the R800 million preference shares back to shareholders via a special dividend;

You are correct.


The 6% earned on dividends is too low when compared to a JSE all share tracking index fund which has over the past 17 years (28 June 2002 to 28 June 2019) years returned 10.5% annually.


A 15 year analysis (2005 to 2019) of the company’s cash flows has shown possible reason why Caxton keeps such high cash balances and Preference share balances that earn low dividend rates. The findings are discussed and presented below.


Caxton is possibly not only using its high cash balance and preference share Investments as a safety cushion,

But also as a way to guarantee the payment of dividends to its shareholders.


Caxton has from 2005 to 2019 produced net cash from operations of R9.68 billion.

Included in the R9.68 billion are interest from consistent high cash balance and dividends received of R1.73 billion.

The company has then had to incur Property ,Plant and Equipment expenditure of a total of R5.08 billion from its capital intensive print business.

Leaving it with R4.6 billion available for distribution to shareholders.


The company has over the 15 year period returned to shareholders via dividends and share buybacks a total of R4.36 billion.

Without the interest and dividends received of R1.73 billion,

had the company continued to pay dividends at the current level it would have result in a shortfall of R1.49 billion.


This is where the R1.73 billion income from dividends and interest becomes important.

The amount helps covers this shortfall.

It therefore seems that Caxton is keeping high cash and equivalents balances to

  1. have a safety cushion in bad years and

  2. meet dividends to shareholders.


Cash generated from operations, capital expenditure and distributions to shareholders:

With respect to the purchase of other businesses,

The company has spent R1.61 billion acquiring stakes in

‘Private Property South Africa’ website, Flip File, Boland Printers, Nampak Cartons and Labels among others from 2005 to 2019.


In turn,

The company has sold businesses such as

Maskew Miller, Pearson Holdings and Times Media Group among others amounting to R1.47 billion (see below).


The company has therefore financed the purchase of other businesses through the sale of others.


What then about the R800 million earning 6%?

We could call for the R800 million held in preference dividends to be sold and the cash be returned to the ordinary shareholders via a special dividend for reinvestment at higher rates.

However

This obviously will lead to a drop in the dividend received from the company,

but,

that will possibly result in rioting from shareholders.


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