2016 Letter

[Mephistopheles]

A bit confused by this regarding the BAC preferred:

 

"If the dividend rate on Bank of America common stock – now 30 cents annually – should rise above

44 cents before 2021, we would anticipate making a cashless exchange of our preferred into common. If the

common dividend remains below 44 cents, it is highly probable that we will exercise the warrant immediately

before it expires."

 

I'm assuming 44 cents is significant because that would make the common dividend > their 6% preferred dividend. However, I always thought the warrant strike price got adjusted for common divs, so not sure why he cares. But my guess is that since the common dividend effectively results in a dividend reinvestment at market price and he'd rather take the cash if it amounts to greater than the preferred dividend.

[rolling]

The BAC Warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion ($7.142857/share).

 

which is precisely the same that was in 2014 annual report:

 

The BAC Warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion ($7.142857/share).

So no dividend adjustment. As such, it seems he'll do the trade when not doing it starts meaning losing money.

[gary17]

A bit confused by this regarding the BAC preferred:

 

"If the dividend rate on Bank of America common stock – now 30 cents annually – should rise above

44 cents before 2021, we would anticipate making a cashless exchange of our preferred into common. If the

common dividend remains below 44 cents, it is highly probable that we will exercise the warrant immediately

before it expires."

 

I'm assuming 44 cents is significant because that would make the common dividend > their 6% preferred dividend. However, I always thought the warrant strike price got adjusted for common divs, so not sure why he cares. But my guess is that since the common dividend effectively results in a dividend reinvestment at market price and he'd rather take the cash if it amounts to greater than the preferred dividend.

 

 

Mr. Buffett doesn't often discuss Berkshire's investment portfolio in detail, but he goes out of his way to say that Bank of America has been undervalued. And he applauds the bank--and other companies in the Berkshire equity portfolio--for buying back its shares.

 

"Many of our investees, including Bank of America, have been repurchasing shares, some quite

aggressively," he writes. "We very much like this behavior because we believe the repurchased shares have in most cases been underpriced."

 

This comment comes after he adds an interesting nugget to his paragraphs on holdings of Bank of America warrants and preferred shares starting on page 19. We reviewed that investment on Friday, in a story entitled "Warren Buffett’s $5 Billion Bank of America Bonanza: Thank You, President Trump."

 

In short, Berkshire has warrants to buy 700 million shares of Bank of America at $7.14 apiece. The stock closed Friday at $24.23, so Mr. Buffett is looking at a paper gain of about $12 billion.

 

In the past, Berkshire has said it would probably only exercise the warrants just before they expired, in September 2021. But now, Mr. Buffett says he would consider doing it if Bank of America raises its dividend, and would exchange its Bank of America preferred shares to fund the transaction. Right now, the bank pays a 30 cent-per-share dividend annually, but it it hits 44 cents, it would make the swap, he writes.

 

Why 44 cents? He doesn't spell it out here, but that works out to just over $300 million in annual dividend proceeds. The preferred stock Berkshire now owns pays a chunky 6% annual dividend that also works out to $300 million a year. The preferreds have little downside, so long as Bank of America stays solvent, but they have no upside either. Mr. Buffett is saying he'd rather enjoy the upside on the common stock, about as clear a buy signal as you'll get from the famed stockpicker.

 

A Bank of America spokesperson declined to comment. The bank raised its dividend to 30 cents annually from 20 cents last year.

 

 

[John Hjorth]

Please discuss the contents of the Annual Letter from Mr. Buffett in this topic, and comments about the 2016 BRK Annual Report ex. the WEB Annual Letter here.

 

- To me, it's all getting clogged up here right now.

[gfp]

"Why 44 cents? He doesn't spell it out here, but that works out to just over $300 million in annual dividend proceeds. The preferred stock Berkshire now owns pays a chunky 6% annual dividend that also works out to $300 million a year. The preferreds have little downside, so long as Bank of America stays solvent, but they have no upside either. Mr. Buffett is saying he'd rather enjoy the upside on the common stock, about as clear a buy signal as you'll get from the famed stockpicker."

 

I guess you are copying and pasting someone's article on the matter?  Obviously Warren has been participating in the upside of the common since his "buy signal" at $7.xx / share when he made the deal.  The reason he would convert early is due to the increased investment income he would receive.  The last sentence above is strange.

[writser]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

[scorpioncapital]

Does anyone know if the $587 monthly payment for Clayton homeowners represents just the house or both the land+house? If not the land, do these home owners have to buy the land and pay for a land mortgage?

[John Hjorth]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

writser,

 

It is actually much more complicated than that:

 

This topic is only for those in the know and those invested in BRK  and it goes like this: "Have you sinned" recently [sold BRK]. We sit on three-legged stools in a circle wearing white robes and thongs  [like ?][some of us even wearing large yellow hats at the session], and if anyone has sinned, they must confess their sins, then there is distribution of Rhohypnoles to suppress the unwanted propensity for those with that need.

 

Being a BRK investor isen't that easy.

[ValueMaven]

'Last year, as I mentioned earlier, we spent significant sums getting Duracell in shape for the decades ahead' 

 

What do you think this means?  I have my own thoughts...but would be interested to hear what other shareholders think?!

 

Sincerely,

ValueMaven

[Ballinvarosig Investors]

He really does go to town on hedge funds and their high fee model, most of the rest of the letter seems to be filler. When he talks about hundreds, or maybe thousands of manager (in the entire world) who are capable of beating the index, he is basically telling us that most of us are wasting our time and that we would be better off in index funds.

 

Maybe Prasad should close the forum and redirect the URL to Bogleheads?

[John Hjorth]

He really does go to town on hedge funds and their high fee model, most of the rest of the letter seems to be filler. When he talks about hundreds, or maybe thousands of manager (in the entire world) who are capable of beating the index, he is basically telling us that most of us are wasting our time and that we would be better off in index funds.

 

Maybe Prasad should close the forum and redirect the URL to Bogleheads?

 

At least to me, most likely also to other board members, this is a great question, Ballinvarosig Investors,

 

For my part, this is about:

 

1. If you just hand over your capital to some other indexing market participant, your capital - most likely - actually ends up as "lemming capital" - with all the consequenses of that, including a fee charged,

2. Most likely, some part of your capital, will be invested against your will and your wishes. And if this is about material amounts of money, this will haunt you, and reduce your quality of life, going forward. Or even worse, family money involved in this game, which is actually worse than other peoples money involved.

3. Make sure your "no guaranties" is actually understood by everybody involved. - They are just coattailing you! - That has to be understood!

[tede02]

It was interesting watching the video from the most recent Daily Journal meeting before reading today's annual letter.  It's pretty clear to me that Buffett and Munger would agree that the investing landscape is far more competitive than ever.  There just isn't much low hanging fruit anymore (Munger talked quite a bit about this).  It makes sense.  There are so many more eyes (and computers) looking for opportunity today.  Any anomolies that come along don't last long. 

 

Also, there is so much more capital looking for a home.  As I think about this, going back to the year 1990 for example, there was probably very little ownership of US stocks in places like India and China.  I have no idea what the numbers are now but the change must be mind blowing. 

[Guest longinvestor]

One notable comment is that the entire investment portfolio is "available for sale". Telegraphing the possibility of a giant purchase, with extended liquidity?

[ValueMaven]

One notable comment is that the entire investment portfolio is "available for sale". Telegraphing the possibility of a giant purchase, with extended liquidity?

 

Yes - that was very interesting and odd all at the same.....

 

ValueMaven

[rb]

One notable comment is that the entire investment portfolio is "available for sale". Telegraphing the possibility of a giant purchase, with extended liquidity?

One of the things preventing sales is the deferred tax liability. If tax rates will go down meaningfully it'll make it easier for BRK to sell positions with huge paper gains.

[Guest longinvestor]

Another notable comment was about stock repurchased. What's the condition under which both continuing and exiting shareholders both benefit?

[aws]

Another notable comment was about stock repurchased. What's the condition under which both continuing and exiting shareholders both benefit?

 

He's probably referencing when they bought back over $1 billion in stock from a single shareholder right before tax rates went up.  It saved the shareholder money and probably was necessary for estate planning, while it was done at a price that was cheap enough to benefit the remaining shareholders.  I guess it would be any time a shareholder is required to sell anyway and the stock is trading at a significant discount to intrinsic value.  Such situations are probably few and far between but they could come up again during market panics or before major reforms take effect.

[Guest longinvestor]

Another notable comment was about stock repurchased. What's the condition under which both continuing and exiting shareholders both benefit?join

 

He's probably referencing when they bought back over $1 billion in stock from a single shareholder right before tax rates went up.  It saved the shareholder money and probably was necessary for estate planning, while it was done at a price that was cheap enough to benefit the remaining shareholders.  I guess it would be any time a shareholder is required to sell anyway and the stock is trading at a significant discount to intrinsic value.  Such situations are probably few and far between but they could come up again during market panics or before major reforms take effect.

 

Makes sense. "Single transaction" preferred over buying from the market. A number of large shareholders are 80+.

[valueinvesting101]

I guess those entire portfolio available for sale comments would be more meaningful for large holding such as AXP especially given Munger's comment about AXP during DJCO meeting and earlier comments about COSTCO account.

 

Most likely that comment about all position available for sale is signal for Management and Boards of the companies.

 

It can even true for IBM. IBM stock had dipped below avg. purchase price of $170/share but there was hardly any buying by Berkshire which seemed bit odd to me. Considering size of the Apple position it looks to be initiated by Buffett himself. Todd and Ted managed combined $21 billion but $7.6 billion of that is from Pension portfolio so only $13.6 billion were invested in portfolio listed in AR. So Buffett is buying $6.7 billion worth of Apple but didn't add IBM. It could very well be on the chopping block.

 

 

There are more details about Duracell in the MD&A section:

 

The earnings increase reflected increased earnings from Forest River and apparel and footwear businesses, partly offset by pre-tax losses of Duracell. From its acquisition date, Duracell incurred approximately $109 million in transition, business integration and restructuring costs.

 

Tone seemed less celebratory in this year's letter: there were no mention of Powerhouse Six,  Big Four/Five or no picture in the end. Less/no discussion about bolt-on acquisitions or their aggregate number.

 

[LC]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

 

Business as usual is good, I would assume. Especially when business as usual is the way that Buffett has compounded money over his professional lifetime.

[rb]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

 

Business as usual is good, I would assume. Especially when business as usual is the way that Buffett has compounded money over his professional lifetime.

Yea, billions of dollars of airline stocks popping up is definitely not business as usual. While I may understand Apple - airlines are not business as usual.

[Jurgis]

Yea, billions of dollars of airline stocks popping up is definitely not business as usual. While I may understand Apple - airlines are not business as usual.

 

Yeah, it's not business as usual, but as others have said, he's likely still buying. Or negotiating a full purchase of LUV?

So he won't say anything until that's resolved...

 

Overall, don't expect him to mention any investment that he's still actively changing (buying/selling).

[Guest longinvestor]

One notable comment is that the entire investment portfolio is "available for sale". Telegraphing the possibility of a giant purchase, with extended liquidity?

 

Yes - that was very interesting and odd all at the same.....

 

ValueMaven

 

Seen in the context of WEB's comments on share issuance, "prefer colonoscopy over issuing shares", selling the marketable securities makes a lot of sense. He says "I'm learning"  ;D(Dexter, GenRe..). If they don't issue shares at all (or very seldom) it doesn't get better than this for the continuing shareholder; Per share earnings growth from internal cash generation AND stock buybacks. There is magic being weaved @ BRK when it comes to the focus on per share!

[ValueMaven]

One of my more favorite lines:

 

'Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the

cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be

prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark

clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s

imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do'

[writser]

My 2cts: bit of a boring letter. Float is good, high fees are bad, issuing Berkshire stock was bad, America is good, not expensing stock options is bad. Stock buybacks are good or bad, depending on price. And please insure your car at geico.com, thank you very much. Not much news if you've read the past 20 letters.

 

Business as usual is good, I would assume. Especially when business as usual is the way that Buffett has compounded money over his professional lifetime.

 

Sure. I was not criticizing Berkshire's performance or Buffett's business acumen. I just think the letter was bland and mostly a rehash of his pet issues. He avoids all sensitive / controversial subjects.