Date: 2025-08-27
LBS.TO is a split share corporation that invests primarily in a portfolio of Canadian bank stocks (BMO, RBC, TD, Scotiabank, CIBC, and National Bank). It uses leverage and pays very high dividends, appealing to income-focused investors. The structure splits into preferred shares (safer, fixed distribution) and Class A shares (leveraged equity with higher risk/reward and dividends).
Is the business model simple and sustainable?
- Simple? Yes. LBS essentially holds bank stocks, uses leverage, and distributes high dividends.
- Sustainable? Questionable. The model depends heavily on Canadian bank performance, interest rates, and its ability to continue paying high distributions. Cash flow is negative, meaning the dividend is not covered by true earnings — it relies on capital appreciation and portfolio performance.
Durable Competitive Advantage (Moat)?
- LBS itself does not have a moat — its portfolio companies (Canada’s Big 6 banks) do.
- Its “advantage” is simply exposure to banks with a high-yield vehicle, but that is not unique or defensible.
Competitors & Positioning
- Competitors: Other split corps (e.g., DFN.TO, BK.TO, GDV.TO), bank ETFs, and covered call funds.
- Positioning: Offers very high dividend yield (~12%), which attracts yield-seeking retail investors. However, ETFs offer more sustainable payouts with less risk.
Management Competence & Alignment
- Run by Lysander Funds, which manages multiple split corps.
- Incentives are tied to assets under management (AUM), not necessarily maximizing long-term shareholder value.
- Dividends are maintained even at the expense of capital erosion — showing they prioritize yield optics over balance sheet strength.
Valuation vs. Intrinsic Value
- DCF Value ≈ $43/share
- MEV Value ≈ $17/share
- Market Price ≈ $9–10/share
Appears deeply undervalued relative to intrinsic models. However, DCF assumptions may not hold due to weak cash flow sustainability.
Capital Efficiency
- ROIC (TTM) 17.99%, well above 5Yr average (6.75%).
- Suggests recent strong performance, but long-term track record is weaker.
- Dividend payout far exceeds sustainable free cash flow — capital not reinvested efficiently.
Free Cash Flow
- FCF (TTM) -$1.88M
- 5Yr Avg FCF -24.82M
Weak. Reliance on portfolio performance, not organic cash flow generation.
Balance Sheet Strength
- Current Ratio: 1.96 (slightly below the 2.0 safety threshold).
- Debt-to-equity: Data not provided, but leverage inherent in split structure.
Balance sheet is fragile, exposed to downturns in bank stocks.
Consistency of Earnings & Growth
- Revenue Growth (5Yr): -61%
- Net Income Growth (5Yr): +65M (volatile)
- Book Value Growth (5Yr): -1.36%
Extremely inconsistent, earnings look inflated vs. declining revenue base.
Margin of Safety
- Price ≈ $9 vs. MEV ≈ $17 → ~47% discount.
- BUT negative FCF and fragile model reduce true margin of safety.
Biggest Risks
- Dividend cut (common with split corps under stress).
- Rising interest rates → hurt leveraged structure.
- Canadian banking downturn (housing, credit cycle).
- Dilution risk if more shares issued.
Dilution or Bad Acquisitions
- Shares outstanding grew 63% over 5 years → heavy dilution.
- No acquisitions, but dilution is a red flag.
Cyclical or Stable?
- Highly cyclical because tied to Canadian banks.
- Would perform poorly in recession (especially housing/credit downturn).
5–10 Year Outlook
- If Canadian banks remain strong, LBS can sustain high payouts.
- If banks face downturn, NAV erosion + dividend cuts likely.
- Likely not a compounding machine — more of an income play.
Buy & Hold if Market Closed 5 Years?
- Likely no — because distribution sustainability is uncertain and NAV erosion could destroy capital.
Capital Allocation (Reinvesting vs. Returning)
- Clearly prioritizing returning cash (dividends) over reinvestment.
- Not value-accretive long-term.
Why Mispriced?
- Investors see high yield (11–12%) and overlook risks.
- Market likely prices in risk of dividend cut and capital erosion.
Key Assumptions & Risks to Thesis
- Assuming Canadian banks stay profitable.
- Assuming dividend is sustainable.
- Thesis breaks if dividend is cut or banks face prolonged weakness.
Fit in Portfolio
- Only as a speculative, income-oriented position.
- Not a core holding for long-term compounding.
Intrinsic Value & Final Verdict
- Conservative intrinsic value closer to $17/share (not $43).
- At ~$9, stock looks undervalued but risky.
- Verdict: HOLD/Speculative BUY (for yield hunters only, not true long-term value investors).
Final Takeaway:
LBS.TO is not a wealth-compounding business. It’s a leveraged income vehicle tied to Canadian banks. While it trades well below estimated intrinsic value and offers a juicy yield, its fundamentals — negative FCF, dilution, fragile balance sheet — make it unsuitable as a core long-term holding. This is more of a tactical income play with significant risk if the dividend is cut.
Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Always perform your own due diligence or consult with a financial advisor before making investment decisions.
