Should be getting a presser some time soon - Annual Dividend

[Smazz]

Companies which have a dividend capacity you would think outperform.

 

How many companies that do not have the capacity eventually fail? Not sure if that goes into the equation but it must and there is no shortage of these.

 

This is not a scientific study and no animals or Canadians were harmed in this experiment! :D

[Munger_Disciple]

I don't understand why some of the message board members are excited about FFH dividend declaration. Why on earth did FFH sell more shares a few weeks ago and then declare a dividend now? It makes no sense whatsoever. Assuming they needed to sell stock to complete the purchases of subsidiaries, they could have sold less stock had they not foolishly declared dividends. This would have resulted in less share dilution to existing shareholders. And by the way, shareholders would have saved taxes (on dividends) had FFH retained the earnings.

[Parsad]

Looks like some of us were bang on $10 US /Share  Payable Jan 26

 

When aren't you guys right!  Many of you know the company as well as Fairfax's management...hell, some of you called the acquisition of ORH well before anyone else got wind, especially the media. 

 

I still think they were going to pay out $13 Smazz, but when they read some of your guys posts, Prem got scared and changed it to $10.  ;D  Cheers!

[oec2000]

Dividends are not compensation.  Stock grants are compensation, salary is compensation, bonuses are compensation.  But dividends, that's not compensation... it's just their rightful slice of what they already own.

 

Let's compensate them... pay them more.  These guys are underpaid and if cash flow is what they need, then let's pay them appropriately. 

 

As for the dividend, I like the dividend and I hope they raise it to the moon -- it will increase the ROE of what gets left behind. 

 

Agree completely with you on the compensation bit.

 

As for "raising the dividend to the moon", there is no reason why ROE should rise on what's retained except to the extent that leverage has increased because of the higher payout. The same ROE effect could be achieved much more efficiently through share buybacks at discount to book. Moreover, as a US tax resident, you should not be happy about the unfavourable tax treatment of Cdn dividends. Also, I wonder whether you have considered, as a LEAP holder, that you are adversely affected by a high dividend (although this should clearly not factor into mgmt considerations).

[Smazz]

Looks like some of us were bang on $10 US /Share  Payable Jan 26

I still think they were going to pay out $13 Smazz, but when they read some of your guys posts, Prem got scared and changed it to $10.   ;D  Cheers!

yea, he asked me to not wait so long to post the dividend he is to put out next year 8)

[Smazz]

Guessing that it will be a min. of $10, possibly slightly higher 

 

I didnt realize Gaf63 hammered it bang on! :o

[ERICOPOLY]

Dividends are not compensation.  Stock grants are compensation, salary is compensation, bonuses are compensation.  But dividends, that's not compensation... it's just their rightful slice of what they already own.

 

Let's compensate them... pay them more.  These guys are underpaid and if cash flow is what they need, then let's pay them appropriately. 

 

As for the dividend, I like the dividend and I hope they raise it to the moon -- it will increase the ROE of what gets left behind. 

 

Agree completely with you on the compensation bit.

 

As for "raising the dividend to the moon", there is no reason why ROE should rise on what's retained except to the extent that leverage has increased because of the higher payout. The same ROE effect could be achieved much more efficiently through share buybacks at discount to book. Moreover, as a US tax resident, you should not be happy about the unfavourable tax treatment of Cdn dividends. Also, I wonder whether you have considered, as a LEAP holder, that you are adversely affected by a high dividend (although this should clearly not factor into mgmt considerations).

 

You are right, buybacks are just as good from an ROE standpoint.  And yes, it only boosts ROE because it leverages up the company... after the big gains in the past two years coupled with shrinking underwriting, it seems like a decent way of increasing a flagging float:equity ratio.

 

I don't hold the LEAPS anymore... I exercised them to get the dividend.  A year early on some of them, but they were low strikes so the dividend represented a quite high percentage return on the cash I deployed in the exercise.

 

CDN dividends don't impact me any more than US dividends (as I understand it) -- I get a foreign tax credit to reimburse me.

 

My dividend preference is simply because I want more cash flow -- I felt a little bit hostage to Mr. Market last March.  This year going forward I can at least live on the dividends and not worry about selling anything to fund my lifestyle.  I'm in equities only but my dividend is now more than I earned when I had a job -- and once Wells Fargo restores their dividend things are really going to be awesome.

 

[oec2000]

You are right, buybacks are just as good from an ROE standpoint.  And yes, it only boosts ROE because it leverages up the company... after the big gains in the past two years coupled with shrinking underwriting, it seems like a decent way of increasing a flagging float:equity ratio.

 

If mgmt wanted more torque, they would have done that by issuing less shares for ORH. I suspect that PW wants to have enough slack in the balance sheet to capitalise on opportunities. (He has spoken about having the ability to ramp up premiums significantly in case the market should harden, for e.g.) It's irrational (and I would even say unfair to existing shareholders) to issue shares at a discount to intrinsic value and then almost immediately use some of those proceeds to pay higher dividends.

 

I don't hold the LEAPS anymore... I exercised them to get the dividend.  A year early on some of them, but they were low strikes so the dividend represented a quite high percentage return on the cash I deployed in the exercise.

 

My point exactly - that if the dividend were not so high, we would not be "forced" into exercising the LEAPs early.

 

Perhaps I'm reading too much into it but I have wondered whether the rush to delist from NYSE and the "high" dividend are part of FFH's plan to wind down options activity - to close down another avenue for short attacks in the future.

 

 

[oec2000]

CDN dividends don't impact me any more than US dividends (as I understand it) -- I get a foreign tax credit to reimburse me.

 

My dividend preference is simply because I want more cash flow -- I felt a little bit hostage to Mr. Market last March.  This year going forward I can at least live on the dividends and not worry about selling anything to fund my lifestyle.  I'm in equities only but my dividend is now more than I earned when I had a job -- and once Wells Fargo restores their dividend things are really going to be awesome.

 

You're right, of course. My error. I got confused with the preferential tax treatment of dividends paid by US companies. Since FFH is a Cdn company, this preferential treatment doesn't apply to you. The point I wanted to make was that a US taxpayer with a high marginal tax rate gets penalised by a high dividend payout. Lower dividends = higher book = higher share price = long term capital gains which are taxed preferentially and only when the stock is sold.

 

Like you, I'm retired so can understand your preference for income. However, I deal with the situation differently. I have a HELOC that is enough to cover living expenses for 5 years. Combined with income from dividend paying investments, this can keep me going for well past a market cycle before having to worry about selling stocks. I'm thus able to invest without having to give undue consideration to dividend-paying stocks only.

[ERICOPOLY]

a US taxpayer with a high marginal tax rate gets penalised by a high dividend payout. Lower dividends = higher book = higher share price = long term capital gains which are taxed preferentially and only when the stock is sold.

 

A little while back (2003?) Bush dropped our dividend tax rate to 15%.  So even if I make $1b in dividends, my tax is only $150m.  But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

 

 

[Myth465]

I lean towards holding my Leaps. They are 2011 and I can exercise in December, Collect the DIV, and then hold the shares I want. I have 1 Leap and it is my biggest position and is deep in the money. Obviously I cant hold all 100 shares. I think 1 year should do wonders for BV but its a gamble. Are there any 2012's on the Canadian boards.

[jasonw1]

For the deep in the money LEAPS, I find it's actually better to convert to shares now, as there is no time premium for them, and you lose $10 dividend if not converting. The bid/ask spread is also pretty wide, ~10$, so it's not worthwhile to sell it either.

 

I just coverted my 2011 LEAPS. Only thing is you need to put in extra capital to get the actual shares.

 

[Uccmal]

Are there any 2012's on the Canadian boards.

 

No, no options at all for FFH.

 

For the deep in the money LEAPS, I find it's actually better to convert to shares now, as there is no time premium for them, and you lose $10 dividend if not converting. The bid/ask spread is also pretty wide, ~10$, so it's not worthwhile to sell it either.

 

I just coverted my 2011 LEAPS. Only thing is you need to put in extra capital to get the actual shares.

 

 

I noticed the time premium is gone as well.  I exercised my high dollar value Leaps -280s but cannot afford to exercise the rest.  My margin has gone through the roof putting me at risk in other areas.  Fortunately I have already bought a tranche of puts on SPY units. 

 

 

[Guest Dazel]

 

Leucadia has a similar dividend policy...which depends on their operations the year before. No dividends there for the last two years!

So cheers to the Fairfax team.

We will take the big chunk of cash with a grin from ear to ear!

 

Dazel.

[Myth465]

Dont you think the cheap leverage has some sort of value?

[gaf63]

Ericopoly,

the holding period is 60 days on either side of the ex-div date

 

"Dividends are taxed either as ordinary income or as qualified dividends. In order to be taxed as a qualified dividend, the investor "must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date," as the IRS explains in Publication 550."

 

As to the foreign tax credit for US residents, I received 58% of the Canadian tax withheld as a  tax credit.  The % will change depending on total AGI and deductions( 2 pg. IRS form)

 

 

[GaliPart]

A little while back (2003?) Bush dropped our dividend tax rate to 15%.  So even if I make $1b in dividends, my tax is only $150m.  But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

 

Ericopoly,

 

Actually, the lower qualified dividend rate (in the U.S.) expires at the end of 2010--so next year your dividends will be taxed at your ordinary income tax rate unless the tax code changes. 

 

          GaliPart

[ERICOPOLY]

A little while back (2003?) Bush dropped our dividend tax rate to 15%.  So even if I make $1b in dividends, my tax is only $150m.  But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

 

Ericopoly,

 

Actually, the lower qualified dividend rate (in the U.S.) expires at the end of 2010--so next year your dividends will be taxed at your ordinary income tax rate unless the tax code changes. 

 

          GaliPart

 

Then I will be back in the "no dividends please" camp.  That is really BS -- getting taxed 35% after already having paid tax on the corporate income?

 

I am in Sydney right now for a month, just enjoying the beach, seeing the extended family, and being away from the wet Seattle climate. I love their tax code here.  Australia has a dividend franking system.  Australian residents aren't taxed on their dividends so long as it's an Australian company paying the dividend and the company has already paid tax on that money.  Additionally, their corporate tax rate is 30%.  Then they have no gift taxes, no inheritance taxes, and much less in the way of property taxes (they have a land tax in some areas but it's only applicable to the land assessed value).  It seems the only people who really pay the high taxes are the wage earners (not only are income taxes high, but there are high regressive "GST" sales taxes).  For somebody living off of dividends though, this is a much better situation than the US.  Plus, I'm a dual citizen... the only thing holding me back is my wife's family (in Seattle).

 

[Uccmal]

Dont you think the cheap leverage has some sort of value?

 

Obviously, the collective doesn't think so.  And in this case I side with the collective.  FFH is at its annual high for the year.  If there is some sort of significant insurance event in July or August you would kiss the value of your options away.  A round about way of saying that I wouldn't buy FFH at this price at all when I can likely get it cheaper sometime later. 

 

RE: Dividend - As per Smazz earlier there is really no point in debating this item.  FFH is going to have a small dividend every January unless the shit hits the fan so you might as well accept it. 

 

Prem is now committed to the point of being trapped.  Any signal that they couldn't afford it would put FFH back into deep value territory.  Buybacks aside there is no way he wants to see that stock going down below book again. 

[Myth465]

Uccmal very valid points and you do now have me thinking about collecting the Div and reducing my position.

 

You wouldnt buy but are you selling currently? Do you feel as though the shares are too rich to hold? Fairfax has a fairly decent quarter from a portfolio position (I think there are 2 - 3 decent gains), but I dont think anything as significant as the bond or cds gains. 

 

Also I am in a very interesting position. All of my assets except for my Leaps are held in Roth or 401 Accounts. Thats leaves me with no available margin. I thought about this a few months ago and called my broker. They said I could exercise my shares and sort things out within a few days. I think that would allow me to collect the dividend but, timing would be very interesting.

[twacowfca]

A little while back (2003?) Bush dropped our dividend tax rate to 15%.  So even if I make $1b in dividends, my tax is only $150m.  But I think the shares need to be held at least 1 yr before that lower tax rate applies -- so next year my dividends will be at 15% unless the tax code changes.

 

Ericopoly,

 

Actually, the lower qualified dividend rate (in the U.S.) expires at the end of 2010--so next year your dividends will be taxed at your ordinary income tax rate unless the tax code changes. 

 

          GaliPart

 

Then I will be back in the "no dividends please" camp.  That is really BS -- getting taxed 35% after already having paid tax on the corporate income?

 

I am in Sydney right now for a month, just enjoying the beach, seeing the extended family, and being away from the wet Seattle climate. I love their tax code here.  Australia has a dividend franking system.  Australian residents aren't taxed on their dividends so long as it's an Australian company paying the dividend and the company has already paid tax on that money.  Additionally, their corporate tax rate is 30%.  Then they have no gift taxes, no inheritance taxes, and much less in the way of property taxes (they have a land tax in some areas but it's only applicable to the land assessed value).  It seems the only people who really pay the high taxes are the wage earners (not only are income taxes high, but there are high regressive "GST" sales taxes).  For somebody living off of dividends though, this is a much better situation than the US.  Plus, I'm a dual citizen... the only thing holding me back is my wife's family (in Seattle).

 

 

 

Kirribilli on the bay.  Rainbow lorikeets on the balcony.  The Sidney Yacht Club below.  Jump on the ferry. Jump off.  Fireworks on the bridge at midnight of the new year.  Wish I were there. :)

[Uccmal]

You wouldnt buy but are you selling currently? Do you feel as though the shares are too rich to hold? Fairfax has a fairly decent quarter from a portfolio position (I think there are 2 - 3 decent gains), but I dont think anything as significant as the bond or cds gains. 

 

Myth.. Lets put it this way.  I exercised about 25% of my total Leaps - I still hold ones that are deeper in the money with the time value removed.  I will likely sell some shares, perhaps half of those I exercised after collecting the dividend, depending on what the shares do.  I will be doing it primarily to reduce my margin debt to safer levels.  FFH will still remain 40% or possibly greater of my holdings.

 

If FFH suddenly rose dramtically I would likely take some more profits, and so on, until it reached 2 x book where I would reduce it to a small long term holding.  Moving target, as always, based on reported book values. 

 

 

[Myth465]

Thanks for the color. That makes perfect sense. I will hold my Leap. I only own 1 and its about 24% of my portfolio. I also lack the margin access to do much in terms of exercising. It sounds like you arent buying due to valuation but arent selling significant portions of your position. Thats what I was thinking. 

[Smazz]

if you look at the stock price over the last few years, the market price has increased AFTER paying the dividend!

 

Not what the books taught me...lol....

[GaliPart]

Dont you think the cheap leverage has some sort of value?

 

Obviously, the collective doesn't think so.  And in this case I side with the collective.  FFH is at its annual high for the year.  If there is some sort of significant insurance event in July or August you would kiss the value of your options away.  A round about way of saying that I wouldn't buy FFH at this price at all when I can likely get it cheaper sometime later. 

 

 

The collective may be right on this one, but it might not.  I don't know about how others look at it, but here is how I would do my analysis assuming (a) relatively deep in-the-money LEAPs (so that there's no time premium) and (b) no tax issues (see more on this below).  (I am also largely ignoring any decision on whether to hold or sell FFH--in other words, I am assuming that if you're willing to have a position in FFH then you are agnostic regarding whether the position is in stock or LEAPs.) 

 

I would begin by looking at the opportunity cost: If the LEAPs are something like $250 (I am assuming such calls don't have any time premium in them), and the dividend $10, I would look at things in terms of could I get a more than 4% return on that $250 if I did something else with it.  Clearly the strike price has an impact on this.  ($10 / $250 = 4%, but $10 / $100 = 10%)  If I think that I can get a better return elsewhere, this definitely impacts my decision. 

 

I would also consider the insurance value of the LEAPs.  Holding the LEAPs also give some downside protection--it limits the downside in two ways.  First, it provides some protection by not going down as much (in dollar terms) as the stock if the stock plummets (because the time-value of the LEAPs will increase).  Second, it limits the total loss to the equivalent of FFH at $250--if you were buy-and-hold and FFH ends the year / Jan 2010 execution date below $250, the most you would lose would be the equivalent of selling FFH at $250.  Of course, if you're not planning on holding too long then this isn't too much of a factor. 

 

In terms of tax issues, obviously executing the LEAPs has two effects (in the U.S.).  First, it give you the dividend which will have foreign withholding (in the US to taxable investors), and be taxed at 15%.  It will also re-set (again in the US) your effective purchase date of the stock to the date you execute--potentially causing you to realize gains at the short-term rate if you sell the stock within a year from the execution date.  (Of course, this assumes that you bought the LEAPs previously, and they would be subject to long-term rates at some point if you sold them--the date will depend on when you bought them and when you sold them.)  Remember that long-term capital gains rates in the US will increase next year under current US law, so that may affect the calculation as well, depending on how long you want to hold things / when you execute or sell the LEAPs.

 

Anyway, the bottom line is that, from my perspective, there are a number of factors that enter into the equation in additional to FFH's valuation, of which leverage is only one.

 

          GaliPart