wknecht Posted February 20, 2015 Posted February 20, 2015 I am kind if disappointed that there wasn't a rights offering as well. The stock isn't that expensive when you adjust reported book value by unrealized gains in their equity/control accounted affiliates. It was something like 1.1x. I don't have an issue with them issuing equity to get a large deal done, but just wish it had been offered to shareholders instead of to an underwriter at a discount... They have more than enough money on hand to have been able to do this with some flexibility in another issuance of debt/preferred shares if rights offering turned out to be undersubscribed (unlikely after killer 2014 results...). How did you get to 1.1x? Reported BV was $395 and then I added $20 from roughly $450m of unrealised gains on equity accounted stakes. Prem gave that figure and it got me to 1.3x BV when I did the maths at CAD $670 per share. But I don't think they gave a figure for unrealised gains on consolidated stakes. Did I miss something? You've got to find another $91 in book value per share to get to 1.1x! Which would make me very happy ;) I still don't really get why people would rather a rights issue than just buying more, if it is so attractive! They also paid a 10 USD dividend (went ex in mid January I believe).
Munger_Disciple Posted February 20, 2015 Posted February 20, 2015 To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend?
giofranchi Posted February 20, 2015 Posted February 20, 2015 I still don't really get why people would rather a rights issue than just buying more, if it is so attractive! Pete, Usually rights are offered at much lower prices... Biglari, for instance, has offered for the second year in a row the rights to buy BH stocks at a price far below BVPS after all the rights were exercised. This is why I would have preferred this solution. ;) Gio
naboo Posted February 20, 2015 Posted February 20, 2015 To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend? I have the exact same question.
TwoCitiesCapital Posted February 20, 2015 Posted February 20, 2015 I am kind if disappointed that there wasn't a rights offering as well. The stock isn't that expensive when you adjust reported book value by unrealized gains in their equity/control accounted affiliates. It was something like 1.1x. I don't have an issue with them issuing equity to get a large deal done, but just wish it had been offered to shareholders instead of to an underwriter at a discount... They have more than enough money on hand to have been able to do this with some flexibility in another issuance of debt/preferred shares if rights offering turned out to be undersubscribed (unlikely after killer 2014 results...). How did you get to 1.1x? Reported BV was $395 and then I added $20 from roughly $450m of unrealised gains on equity accounted stakes. Prem gave that figure and it got me to 1.3x BV when I did the maths at CAD $670 per share. But I don't think they gave a figure for unrealised gains on consolidated stakes. Did I miss something? You've got to find another $91 in book value per share to get to 1.1x! Which would make me very happy ;) I still don't really get why people would rather a rights issue than just buying more, if it is so attractive! Fairfax reported unaudited equity figures at their Q4 announcement of $9.74B. Add in an addition 450M for the unaccounted gains in associates and you get equity of $10.19B. With 21.2M shares outstanding, you get a P/B of $480. 1.1x this figures is about $528 which is right around where it's been trading this past month.
Guest glavacem Posted February 20, 2015 Posted February 20, 2015 Picked up some shares today for a family member. Will probably buy some of the prefs also for the same family member.
Grenville Posted February 20, 2015 Posted February 20, 2015 I think the below answers some questions: http://www.bloomberg.com/news/articles/2015-02-20/watsa-s-fairfax-sells-shares-for-brit-deal-to-guard-credit-grade On a Feb. 17 conference call the day after the deal announcement, Fairfax Chairman and Chief Executive Officer Prem Watsa said that he had “many alternatives” for financing, such as offering debt and bringing in equity partners. Issuing new stock would be the last option, he said. The next day, Standard & Poor’s lowered its outlook on the firm to negative. “The market has responded very favorably to the proposed acquisition,” Paul Rivett, president of Fairfax said in an e-mailed statement Thursday. “We felt it was important to act expeditiously with a stock issue in order to quickly react to recent rating-agency actions.” Watsa said earlier in the week that he would work to maintain Fairfax’s credit quality while seeking financing for the Brit deal. S&P, in issuing its negative outlook on Fairfax, maintained a rating of BBB-, the lowest of 10 investment-grade levels.
Redskin212 Posted February 20, 2015 Posted February 20, 2015 To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend? I would agree - but I believe the annual dividend it really a way to pay Prem the salary he deserves on an equal footing to all shareholders. Remember the man's salary hasn't gone up in years.
Partner24 Posted February 20, 2015 Posted February 20, 2015 I would agree - but I believe the annual dividend it really a way to pay Prem the salary he deserves on an equal footing to all shareholders. Remember the man's salary hasn't gone up in years. ...and Warren doesn't need do to that. Prem can sell some shares from time to time instead. If this was made in a hurry to calm down rating agencies, it shows that rating agencies don't agree with Prem view that Fairfax is very soundly financed and he need to consider them because we get diluted because of that. It doesn't make sense to issue dividends and then dilute all of us with a equity offering below intrinsic value.
matts Posted February 20, 2015 Posted February 20, 2015 To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend? +1. I'm continuously surprised how biased this board is towards FFH despite the moves of the past few years. I wonder if it partially linked psychologically to some of you making a fortune thanks to FFH after the bear raid.
Jurgis Posted February 20, 2015 Posted February 20, 2015 To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend? +1. I'm continuously surprised how biased this board is towards FFH despite the moves of the past few years. Which moves? Personally, I agree that they should not pay dividend. Other than that, of course they make mistakes. Buffett makes mistakes too. Everybody does. Is there a perfect company that doesn't? Tell me the ticker and I'll buy it immediately. ;D
Munger_Disciple Posted February 20, 2015 Posted February 20, 2015 Other than that, of course they make mistakes. Yeah, but you don't expect them to keep making the same mistake year after year. This is why I think it is bad capital allocation decision as opposed to an honest one off mistake made by management.
matts Posted February 20, 2015 Posted February 20, 2015 Other than that, of course they make mistakes. Yeah, but you don't expect them to keep making the same mistake year after year. This is why I think it is bad capital allocation decision as opposed to an honest one off mistake made by management. Exactly. The dividend isn't a one time decision. It's ongoing sub-optimal capital allocation that has never been explained. We need to stop treating poor allocation as a single mistake in the way that me spilling coffee on you is a mistake. "Oh, my bad. Stuff happens. Besides, look at all the other nice things I do for you"
Jurgis Posted February 20, 2015 Posted February 20, 2015 Other than that, of course they make mistakes. Yeah, but you don't expect them to keep making the same mistake year after year. This is why I think it is bad capital allocation decision as opposed to an honest one off mistake made by management. I said "other than that". Anyway, if it's so significant for you, don't invest. Or write to Prem and request that he cans the divvie.
Jurgis Posted February 20, 2015 Posted February 20, 2015 Shareholders unite and revolt! Right. Although I don't care much, I'd be happy to sign or vote for no divvie.
Alekbaylee Posted February 21, 2015 Posted February 21, 2015 I disagree. I like the divvie and would actually like to see it raised to 3% but don't think it will happen soon. I can use that money for whatever purposes I see fit or reinvest in FFH shares if I want to. Shareholders have different situations, objectives and time horizon.
Partner24 Posted February 21, 2015 Posted February 21, 2015 Well, I've been a shareholder uninteruptly for 12 years now and I don't see why I would sell my share any time soon, but I would sign that. Prem, you're a great manager and I like you very much, but that side of managing the business doesn't make sense at all. You're hungry of growth and that's terrific but it should never come at the cost of a poor balance sheet (1999-2006) or diluting your shareholders in order to keep your expenses need. That does not make sense to pay a dividend (1$ of value for 1$ of value-income taxes) and then issue shares at a discount to intrinsic value (1$ of value for 60 cents or so).
Hawks Posted February 21, 2015 Posted February 21, 2015 I seem to remember, from years ago, that there were lots of people (maybe some on this board) who criticized Prem for NOT having a dividend like other insurance companies. Damned if you do, damned if you don't. I'll invest with the likes of Prem, Warren and Sanjeev anytime.
Txvestor Posted February 21, 2015 Posted February 21, 2015 This is the simplistic way I look at this share issue. A roughly 5% share dilution for an approximately 20% increase in float/investments per share, and based on underwriting results of the past decade an equal or better insurance underwriting operations with a clearly less stellar investment record. In addition to this there are obviously some cross selling/cross investment synergies to be had. In addition there Is a better dispersion of risk and a good geographic fit. Best part is that any minor dilution of BVPS will be more than offset by this share issue which is being done at 1.31 times BV. I think based on that Bloomberg article it is pretty apparent why they had the sudden reversal on the share issue option. I think we can take what they said at face value. With the Greek sword near term hanging over their head, I think it was the most expedient near term option they had to close this deal which they obviously feel is a great one. Though I would have preferred no dilution. I can live with a 5% dilution for what we got in return. In fact I added to my position in today's fall by 5%! Having collected my dividend from earlier this month I spent just around an additional 3% of my holdings.
Estimated Profit Posted February 21, 2015 Posted February 21, 2015 Didn't Prem implement the dividend shortly after getting a large loan from RBC to buy more shares for himself? It's his way of earning more money to pay off the loan. Please correct me if I'm wrong. Also, would it be preferable to cut the dividend and have Prem pay himself a la Frank Stronach? I think the divvie is the lesser of two weevils.
Partner24 Posted February 21, 2015 Posted February 21, 2015 Also, would it be preferable to cut the dividend and have Prem pay himself a la Frank Stronach? I'm sorry, but when you tell about Ben Graham, Warren Buffett, John Templeton and the likes, you're not in the "Frank Stronach" league. If he wants shareholders who only care about the next quarter financial community targets, he can change his langage, but long term shareholders think about capital allocation soundness. You never see these kind of things with Berkshire Hathaway. That's the bar that we inspire ourselves from, not Frank Stronach.
wknecht Posted February 21, 2015 Posted February 21, 2015 +1 I disagree. I like the divvie and would actually like to see it raised to 3% but don't think it will happen soon. I can use that money for whatever purposes I see fit or reinvest in FFH shares if I want to. Shareholders have different situations, objectives and time horizon. How do you rationalize the avoidable capital destruction? If anything, I feel like a stock dividend would make more sense. Then the people that want dividends can sell in a more tax efficient manner while maintaining the same number of shares, and the folks that don't want the cash and related tax inefficiencies forced on them can do nothing. I can see multiple reasons this wouldn't happen though.
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