GFRhodes Posted March 3, 2015 Share Posted March 3, 2015 Warren and Charlie’s 50th anniversary addenda to this year’s BRK shareholder letter emphasise the importance of re-investment. Warren writes that “a conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimal cost… we can move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise.” The example he cites is See’s Candy, which has earned $1.9bn pre-tax since 1972 while requiring only $40m additional capital. But what if See’s had been an ordinary public company without someone in charge of capital allocation who could consistently re-invest that surplus elsewhere at a high rate of return? This is often the case in the Asia Pacific region where I invest. I see many great businesses which generate a lot of free cash flow but with apparently limited opportunities to put it back to work. While the ideal would be to return the cash to shareholders, it often ends up sitting idly on the balance sheet or seeking growth in a series of poorly performing side lines. Some examples in my opinion are: HSBC (5 HK), Wharf (4 HK), DuluxGroup (DLX AU), Sitoy (1023 HK), Tsingtao Breweries (168 HK), Galaxy (27 HK), Jollibee (JLB PH), Bosch (500350 IN) etc. I'm not as familiar with the US but arguably Microsoft and Apple fall into the same category. I’m quite interested to know what other investors think. Do you take re-investment into account when assessing a company and its value? Do you shy away from good businesses with limited growth? Link to comment Share on other sites More sharing options...
Jurgis Posted March 3, 2015 Share Posted March 3, 2015 I think that most investors have no clue whether the company they buy has "limited opportunities to put cash back to work". People usually don't do deep enough DD and don't know business well enough to know that the incoming cash has no good uses. Management and investors are usually optimistic and expect that "side lines" will be as successful and profitable as the main business. Or that they are necessary for main business to continue succeeding. I think most investors in AAPL and MSFT think that they should invest in new businesses more rather than just return cash pile to shareholders. Well, perhaps AAPL fans think that Apple can return the cash pile, since the new revolutionary products come out of Steve Jobs' and John Ive's heads with no capex. ;) Anyway, I doubt that there's significant push for companies to return cash to shareholders vs. invest in business. It looks like a lot of companies are already doing that voluntarily. I think there's a lot of press that companies are spending their record profits on buybacks and divvies and not capex. There were threads and press already about the opposite issue: how to make companies to capex more. Finally, I am not sure if Buffett's choice with See's was right. He tells us that chocolate brand does not travel, so See's expansion outside California was not worthwhile. However, this is not really true. Look at Ferrero or Lindt. There are successful pushes of chocolates outside their core markets. Of course, I don't know how profitable they are. (BTW, completely off topic, I have lived in California, I have bought See's chocolates and IMHO they are crap like most American chocolate. Can't compare to European chocolate like Lindt, Neuhaus, etc. :)). Link to comment Share on other sites More sharing options...
Liberty Posted March 3, 2015 Share Posted March 3, 2015 I think most investors in AAPL and MSFT think that they should invest in new businesses more rather than just return cash pile to shareholders. Well, perhaps AAPL fans think that Apple can return the cash pile, since the new revolutionary products come out of Steve Jobs' and John Ive's heads with no capex. ;) Where do you get no capex? They spend huge amounts and I don't think they would ever spend less than they need. Despite that, cash keeps piling up quickly. Makes total sense to return it if you can't spend it. Link to comment Share on other sites More sharing options...
Jurgis Posted March 3, 2015 Share Posted March 3, 2015 I think most investors in AAPL and MSFT think that they should invest in new businesses more rather than just return cash pile to shareholders. Well, perhaps AAPL fans think that Apple can return the cash pile, since the new revolutionary products come out of Steve Jobs' and John Ive's heads with no capex. ;) Where do you get no capex? They spend huge amounts and I don't think they would ever spend less than they need. Despite that, cash keeps piling up quickly. Makes total sense to return it if you can't spend it. It was a joke. If Apple decided to spend most of the cash pile on iCar, for example, would you complain as shareholder? Link to comment Share on other sites More sharing options...
Liberty Posted March 3, 2015 Share Posted March 3, 2015 I think most investors in AAPL and MSFT think that they should invest in new businesses more rather than just return cash pile to shareholders. Well, perhaps AAPL fans think that Apple can return the cash pile, since the new revolutionary products come out of Steve Jobs' and John Ive's heads with no capex. ;) Where do you get no capex? They spend huge amounts and I don't think they would ever spend less than they need. Despite that, cash keeps piling up quickly. Makes total sense to return it if you can't spend it. It was a joke. If Apple decided to spend most of the cash pile on iCar, for example, would you complain as shareholder? If they spent over 150bn (growing every quarter) on a car, yeah, because I don't think they could get a good ROIC on that amount. Might just as well buy Tesla for 45bn ;) Link to comment Share on other sites More sharing options...
KinAlberta Posted April 30, 2016 Share Posted April 30, 2016 Just posting an older article about Apple's cash. I figure the cash actually is real. :-) Netting cash against liabilities is a rather useless point too, but the point about taxes may add a bit of value to the discussion. Why Apple's real cash pile is 99% smaller than you think By Brett Arends, Oct 7, 2015 http://www.marketwatch.com/story/apples-real-cash-pile-is-99-smaller-than-you-think-2015-10-07 Link to comment Share on other sites More sharing options...
TheAiGuy Posted April 30, 2016 Share Posted April 30, 2016 Yeah, so that artical's analysis looks bad. They're netting out operating assets and liabilities in their consideration of "cash", which is probably too conservative (e.g. inventory and purchase commitments aren't really "cash") Link to comment Share on other sites More sharing options...
Graham Osborn Posted May 1, 2016 Share Posted May 1, 2016 I think most investors in AAPL and MSFT think that they should invest in new businesses more rather than just return cash pile to shareholders. Well, perhaps AAPL fans think that Apple can return the cash pile, since the new revolutionary products come out of Steve Jobs' and John Ive's heads with no capex. ;) Where do you get no capex? They spend huge amounts and I don't think they would ever spend less than they need. Despite that, cash keeps piling up quickly. Makes total sense to return it if you can't spend it. It was a joke. If Apple decided to spend most of the cash pile on iCar, for example, would you complain as shareholder? If they spent over 150bn (growing every quarter) on a car, yeah, because I don't think they could get a good ROIC on that amount. Might just as well buy Tesla for 45bn ;) 150b for the iCar? Hell no. 150b for the iWoman? Hell yeah. Link to comment Share on other sites More sharing options...
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