Whilst I love dividends, I don't mind if they stay with the company for appropriate capital allocation.
KAR appears to generate ROE / ROIC > 20% (subject to Oil Prices, as a commodity producer). If they keep this performance over time, I bet they are allocating capital better than me! LOL
It is a growth company, which requires CAPEX/OPEX to grow and diversify (conversely to a tech play).
Looking purely from a dividend perspective, the chances for frustration are high in my opinion, as management appears to prioritize inorganic growth through M&A and organic growth in Brazil
Looking from a business growth perspective, I believe they are doing the right thing - it is important to diversify the asset base across different jurisdictions and assets to increase certainty in revenue and decrease business risks (e.g. Imagine oil prices go low and some sh*1 happens in Brazil? (regulations, problems in OPs, increased royalties, etc?)
For me, the key question for me here is/are: How good are the inorganic and organic growth opportunities presented? How good is the management team?
My knowledge in Oil and Gas technicalities are superficial - the organic growth is good in Brazil (or appears to be), excellent ; the inorganic growth through M&A, for obvious reasons, is unknown. If management allocates capital poorly, our cash is gone!
If there is more unknown in the equation, discount rates for FCF will get higher, and NPV will go down (therefore, valuation gets compressed - i.e. below $2.0).
Really Appreciate inputs and contrasting views on these comments to enrich the discussion!
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