redskin
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Posts posted by redskin
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Isn't the idea of WEB buying capital intensive businesses that they earn a return on capital on the marginal dollar of capital invested that's higher than the cost of capital.
Hence, each dollar invested will be worth more in the future than it is today.
That way, these businesses can absorb the billions flowing into BRK, without him needed to continuously find new investments. Also, there's probably few attractive non-capital intensive businesses at that scale for WEB to invest in.
Several posts have discussed an aim of achieving returns higher than their cost of capital. How do you calculate Berkshire's cost of capital? I'm curious after reading Buffett's 2003 comment, "Charlie and I have not the faintest idea what our cost of capital is and we think the whole concept is fairly crazy, frankly."
Warren and Charlie dismiss any calculation that involves using beta like a cost of capital calculation.
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My guess would be Brad Kinstler from See's Candy.
http://management.fortune.cnn.com/2012/08/22/sees-candies-buffett-berkshire/
Kinstler began his career at Cornhusker Casualty, an Omaha insurance company Berkshire opened in 1970. In 1991 he went to run Cypress Insurance in San Mateo, Calif., for nine years before moving on to Fechheimer Brothers, a Berkshire-owned, Cincinnati-based uniform maker. In 2005, Buffett and Munger tapped him to move back to California and take over See's. Kinstler says he knew little about the business, but jokes, "As soon as I found out I get free candy ..."
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My guess would be Brad Kinstler from See's Candy.
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You will have more cash with the dividend, but wouldn't the IV of the dividend paying stock be higher than the one who bought back?
Less cash with the dividend I believe you meant to say. Assuming a dividend tax of course.
Dividend paying stocks don't have more IV. They just return cash differently.
The IV of $1 distribution is $1 (before tax) no matter how you slice it. But the tax man slices it, and that's why dividends are *always worse if you pay taxes.
* Unless your capital gains tax rate is substantially higher than your dividend tax rate -- and your cost basis is very very low.
But nearly always it's better to repurchase shares no matter how high they trade. Usually it's only someone like Berkshire Hathaway that pays a 35% tax on capital gains versus a 14.5% tax on dividends. Oh, and how ironic it is that he is always bitching about buybacks unless the price is ridiculously low.
Remaining shareholders would be hurt by a buyback at prices above intrinsic value. Yes, you can sell your shares back to the company above intrinsic value. However, if you have large unrealized gains in a great business it may not be beneficial to sell if the intrinsic value is expected to increase significantly over time. If a company is buying back its shares at 2X its intrinsic value i would be reluctant to maintain an investment with that management no matter how great the business is. If management is buying back shares at a 30% premium in a great business and I have significant unrealized gains I would likely stick around even though management is destroying value slightly.
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I prefer buybacks. I'm investing in companies that I think are undervalued, so I perceive buying back shares as a better use of capital than returning it to shareholders. I would NEVER own a stock where I would think buying back shares would be a mistake.
Amen!
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If a low dividend deters a certain group of investors from investing in BAC, then the buyback will potentially be more beneficial. If the low dividend keeps the stock price down then BAC will have the opportunity to buy back more shares at a lower price. Seems like a good strategy to me.
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Buffett said he was in Charlotte to meet with BAC employees a short time ago.
Hi Redskin,
Do you know where I can find Buffett talking about a trip to meet with BAC employees? It's very interesting if he did.
I think it was during the CNBC interview that he mentioned it.
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Does anyone think Moynihan asked Mr. Buffett his thoughts prior to submitting their plan? I hope so.
As it relates to pension funds, we don't have one investment policy statement from a client that says a stock has to pay a dividend. We certainly have a lot of other goofy restrictions, but whether or not B of A's dividend is at some arbitrary level shouldn't matter.
I agree with Sanjeev that share repurchases sub TBV are more attractive.
After reading the press release I got the feeling that Buffett may have advised Moynihan. Buffett said he was in Charlotte to meet with BAC employees a short time ago. I can imagine him bringing a copy of 'Outsiders' and handing it to Moynihan.
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Looks to me that BAC will be allowed approximately $9 billion. Hopefully buybacks.
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Embedded in many of the annual letters lies a central investing theme BRK has followed: Be the lowest cost/unit producer in whatever business you are in. This is the key ingredient to the moat like quality all of his investments. From Walmart/Costco to BNI to the Utilities to Geico and even the BRK HQ! The moat gets deeper as BRK ploughs more and more capital into the business to entrench the cost/unit advantage in ways that no one else can duplicate. Going by Munger/Buffett's recent statements about Wind/Solar energy likely getting "10X" what they invested in 2011-12, at $ 50B to 100B of capital to be invested over the coming years, this has got to be the one with the most attractive cost/unit differentiator for BRK. It would surely be an interesting question for them to answer at the meeting.
Where did they make that statement?
During the annual meeting last year, Buffett said he could see Berkshire allocating $100 billion to the utility over the next decade. I don't think it was specifically wind/solar.
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What are thoughts on MidAmerican? Buffett seems upbeat about the business and he boasts about the huge amount of capex invested, but I don't see the results. After huge amounts of capital invested, net earnings attributable to Berkshire has increased from approximately $1.1 billion in 2007 to $1.3 in 2012. I would like to hear Buffett expand on this at the annual meeting in May.
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What do you think he thinks about when he says:
If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is
dramatically less than the accounting liability
My logic tells me that an endless revolving load is worth 100%. What do you guys think?
BeerBaron
My logic disagrees a bit with with yours. Would you rather have $100,000 or use the $100,000 to purchase a loan of $100,000 with no interest that is long enduring? The answer for me is I would rather have the $100,000 and not have to ever worry about the $100,000 loan. Thus it is worth less than 100%. Having said that, I do think the value is closer to $100% than say 50%.
You also want to make sure not to double count the insurance operations and the float. If you value the float separately (whether or not at 100%) you then should only put a very conservative multiple on underwriting profits of the insurance operations since it may incur sizable catastrophe losses from time to time.
Buffett is conservative in his valuation by putting no value on the underwriting profits.
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Your debt number is a little high think 50 to 75 percent of that. Based on the nature of the business also they can grow the intrinsic value by buying other would business. Possibility of more growth ahead as the world develop.
8-k that Berkshire filed yesterday afternoon said $14 billion of financing from WFC and JPM. They also said they would rollover some existing debt that did not have a change of control clause.
Berkshire 12B (preferred and equity)
3G 4B (Equity)
Debt 14B
Total $29 Billion of the $28 billion deal.
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3G must really see areas for cost cutting or big opportunities in emerging markets. There is a lot of leverage in this deal with $14 billion of debt put on it. I don't know what kind of financing they will get, but lets say they pay 7% on the debt.
Ebitda $2,000
Buffett preferred (700)
Interest on debt (980)
Pre tax profit = $320
$320 million pre tax on their 8.2 billion equity investment is only 3.9%.
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Buffett inviting short sellers to ask questions should make the Q&A even more interesting.
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Buffett has said in the past that he doesn't like to be more than 10% of the average volume of a stock when he is accumulating. Therefore, he is probably able to purchase $40-50 million worth of Berkshire per day when it is trading below the $134,000/share level.
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David Gottesman Said to Be Seller of Berkshire Class A (BRK/A) Stock; Could Save $300M on Tax Bill
If it was Gottesman I think they would've used his name in the press release since he would need to file being a Director.
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I'm curious to know who that long time shareholder is. I'm thinking a doctor from Omaha.
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"Mid American isn't such a good investment in my opinion, although they do relatively well in an industry that is tough."
Berkshire bought Midamerican for $34/share and now values it at $250/share. Approximately 16% annual return.
I thought Buffett's comments regarding Midamerican at the annual meeting were interesting. He believes they may have the opportunity to invest $100 billion over the next 10 years in Midamerican.
How did he talk about the valuation? Was it strictly FCF growth of 16%?
What will the $100b in investments earn though? I guess my problem is I do not understand the return characteristics of a utility company. If you are expecting a 10% return from these investments, I am not that enthused because then you will need a growth in float to get great returns. If these companies earn a teens return, that's great.
Does anyone have a link to a good article describing the shift in capital returns that twacowfca was describing?
This is Buffett's discussion of the Mid American valuation in the 2007 annual letter...
'We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in
which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business
was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several
days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s
offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to
$35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the
time, it hurt.
Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of
one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793
shares at $145 per share.
In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a
reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So
call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.'
Those are great returns, but that was then, and now is now. MidAm's earnings ex the PacificCorp acquisition have been a hair above flat from 2009 to date. PacificCorp is a little better. That is more likely to continue than not for quite a while in the deleveraging of the current super cycle. My questimate is that their incremental return on reinvestment of retained earnings has been below cost of capital in recent years.
One problem with reinvestment in the industry is that some capex is actually expense to comply with emissions mandates from a hostile administration. This type of capex doesn't add to productive capacity.
The $150/share to $250 over last 5 years is approximately 11% annually.
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"Mid American isn't such a good investment in my opinion, although they do relatively well in an industry that is tough."
Berkshire bought Midamerican for $34/share and now values it at $250/share. Approximately 16% annual return.
I thought Buffett's comments regarding Midamerican at the annual meeting were interesting. He believes they may have the opportunity to invest $100 billion over the next 10 years in Midamerican.
How did he talk about the valuation? Was it strictly FCF growth of 16%?
What will the $100b in investments earn though? I guess my problem is I do not understand the return characteristics of a utility company. If you are expecting a 10% return from these investments, I am not that enthused because then you will need a growth in float to get great returns. If these companies earn a teens return, that's great.
Does anyone have a link to a good article describing the shift in capital returns that twacowfca was describing?
This is Buffett's discussion of the Mid American valuation in the 2007 annual letter...
'We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in
which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business
was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several
days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s
offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to
$35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the
time, it hurt.
Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of
one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793
shares at $145 per share.
In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a
reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So
call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.'
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"Mid American isn't such a good investment in my opinion, although they do relatively well in an industry that is tough."
Berkshire bought Midamerican for $34/share and now values it at $250/share. Approximately 16% annual return.
I thought Buffett's comments regarding Midamerican at the annual meeting were interesting. He believes they may have the opportunity to invest $100 billion over the next 10 years in Midamerican.
Best (book) introduction to Buffett and/or business
in General Discussion
Posted
I think Hagstrom's 'The Warren Buffett Way' is a good place to start.