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(B)(N) AIM Aimia Incorporated (Groupe Aeroplan)

May 30, 2013

Drama. Aimia is a success in the difficult business of customer loyalty and how to make it profitable for company and customer alike. Please see, for example, our recent Post on Social Media & The Only One, May 2013.

Naturally, if it’s a success, then there’s a bank that wants to get into the business too, and manage our loyalty – which is a much coveted type of “currency” and as “good as money” – as well as what’s left of our “managed wealth” (The Canadian Press, May 30, 2013, CIBC considering alternatives to renewing Aeroplan deal with Aimia).

Aimia (which started flying with Air Canada as the Groupe Aeroplan, long ago, but is now flying on its own) has been in the Perpetual Bond™ since much lower prices of $12 in 2011 and it’s in the Perpetual Bond™ now at $15. Please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason.

Our estimate of the expected downside in the stock price is minus (-$1) during the next quarter, absent “surprise” (ibid, The Canadian Press). Although we can afford to be sold out at the suggested stop/loss price of $14, we can also buy the July put at $15 for $0.85 per share, and partially offset the cost of that by selling or shorting the July call at $16 against our long position for $0.30 per share today.

So, for the cost of holding the stock between $15 and $16 for the next several months, and the cost of the “collar” at $0.55 per share ($0.85 less $0.30, and negligible transactions costs), we can ride this out and collect our dividends of $0.17 per share per quarter for a current yield of 4.5% in the $117 million that the company is expecting to pay to its shareholders this year.

On the other hand, owning the Bank – for the same reasons, Red Line above Black Line – hasn’t been that bad either (please see Exhibit 2 below) and the current yield at a stock price of $80, up from $70 a year ago, is 4.7% or $0.96 per share per quarter for a total payout of $1.5 billion this year, which is more than the shareholders equity of Aimia ($1.3 billion) and nearly a third of its total assets ($5.2 billion) and half of its debt ($2.9 billion).

Exhibit 1: (B)(N) AIM Aimia Incorporated (Groupe Aeroplan) – Risk Price Chart

(B)(N) AIM Aimia Incorporated - May 2013

(B)(N) AIM Aimia Incorporated – May 2013

Aimia Incorporated is a full-suite loyalty management company. The Company is engaged in the delivery of solutions and full-suite of loyalty services including Coalition Loyalty, Proprietary Loyalty and Loyalty Analytics.

(Please Click on the Chart to make it larger if required.)

And the bank’s dividend of $1.5 billion is nearly half of Aimia’s market value of $2.6 billion at $15 per share, so that one wonders whether the bank – which has $1.5 billion in pocket change – should compete with Aimia, and, therefore, abridge its value, or just buy it for $3.2 billion, which is 50% premium on the Risk Price (SF) of $12 and a 20% premium on the stock price (or 5 years of dividends), in which case we’ll need to cover our calls on Aimia at $16 or only buy the put.

Exhibit 2: (B)(N) CM CIBC Canadian Imperial Bank of Commerce – Risk Price Chart

(B)(N) CM CIBC Canadian Imperial Bank of Commerce

(B)(N) CM CIBC Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce is a Canadian-based, global financial institution with three main businesses, Retail and Business Banking, Wealth Management, and Wholesale Banking.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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