Auction Buyback Announced

[Parsad]

1 minute ago, modiva said:

 

+1 on buyback benefits.  Another benefit is dividend savings which adds to the cash balance year after year.  

 

If the buybacks are less than the intrinsic value, they are still better than dividends. No?

I believe Berkshire is trading at <0.8x intrinsic value, but trading at >1.2X book.

 

 

 

The problem I have of buybacks below intrinsic value is that intrinsic value is a range in valuation based on certain assumptions of cash flow.  If you are incorrect on the cash flow assumptions, you are paying up for those shares...think Eddie Lampert and Sears.  Buying below book, at least earnings are accretive and book value per share rises. 

 

I think the best type of buyback is buying below tangible book, which is what Jefferies was doing over the past 24-36 months.  When you can buy back shares below tangible book, not only is it fully accretive on a per share basis, but you exclude intangibles and goodwill which is where the subjectiveness of cash flow assumptions comes from.  You are literally buying back shares below liquidation value!  Cheers

[Gregmal]

Buybacks work if they are done consistently through the cycle and aggressively at troughs; they work wonders if the business underneath is stable, profitable, and managed in a disciplined way. There is zero debate to this and no better example than shitty mall retailer Dillards. 

[Redskin212]

Eric,

 

For those of us who have been around since the short attack almost 20 years ago now - we are pretty much there  

[modiva]

4 minutes ago, ERICOPOLY said:

9 minutes ago, modiva said:

 

+1 on buyback benefits.  Another benefit is dividend savings which adds to the cash balance year after year.  

 

Ummmmm........

 

How many years does it take at $10 annual dividend to add up to price paid for the shares in the first place?

 

Like.... ummm.... we'll most likely all be dead by then!

 

 In the case of current one time buyback there is savings of $20M every year.  Over 10 years, it equals $200M of unpaid dividends.  

True, it takes long time.  But, if these buybacks happen every year.  The numbers become huge over time.  

Besides, when the share count reduces dramatically, it makes the existing shares dramatically more valuable. 

[ERICOPOLY]

Yes, fewer dividends paid when there are fewer shares after a buyback.

 

The same would happen if dividend were cut after paying a dividend.

 

1.  Let's say a special dividend were paid out amounting to 10% of the stock price.

2.  Further, let's say dividend were cut by the offsetting appropriate amount.

3.  Shareholders can buy more shares with their dividends and can receive the same total aggregate amount of dividends in the future.  They own more shares, and each share receives a smaller dividend.  In sum, it's the same.

 

Buybacks are more elegant, but there is no alchemy other than tax avoidance.

Edited November 19, 2021 by ERICOPOLY

[matthew2129]

Companies that consistently plow a significant portion of their free cash flow to buyback stock instead of issue dividends tend to trade at a premium to their peers b/c having a whale consistently sitting at the bid de-risks the investment and creates a huge tailwind for the price. Do that quarter after quarter, year after year, and the premium becomes permanent. And I'm not talking about the dorks with calculators who only buyback their stock when it's trading at a discount to intrinsic value, I'm talking about the Alpha Chads like AAPL, AZO, NVR ect. who smash the ask and eat themselves every quarter

[ERICOPOLY]

4 minutes ago, modiva said:

 

 In the case of current one time buyback there is savings of $20M every year.  Over 10 years, it equals $200M of unpaid dividends.  

True, it takes long time.  But, if these buybacks happen every year.  The numbers become huge over time.  

Besides, when the share count reduces dramatically, it makes the existing shares dramatically more valuable. 

 

It is an illusion.  See my last post which crossed paths.

 

There is no alchemy.

 

Buffett talks of taxing the rich but avoids taxation.  Just pay a dividend if you want to tax the rich.  Of course, not all of his shareholders are rich and he has to be the fiduciary for everyone.

[ERICOPOLY]

Reinvesting your dividend into additional shares has exactly the same accretive effect assuming that the prices paid for the shares are equal to what the company would have paid, and assuming no dividend taxes.

 

Buybacks are primarily tax avoidance. 

Edited November 19, 2021 by ERICOPOLY

[Parsad]

1 minute ago, Gregmal said:

Well that is why I said Buffett just happens to have an obsession with making money. Same can definitely not be said for Prem the last decade, so let’s not act like he done that. He’s blown one of the greatest bull markets in history doing unnecessary stuff, buying shitcos, bailing out “national treasuries”, unable to even execute a real buyback and constantly having to pull gimmicks because liquidity is shot… I mean you would literally have to try to pick losers consistently to do this bad and even then I don’t think one could match his past decade. So I don’t see how it’s unwarranted to criticize and wonder if there aren’t talented underlings at FFH that could and probably should be calling the shots. It’s no slight either to say that there is some excitement warranted for the next in line at Berkshire either? Why is there so much loyalty to Prem Watsa? 
 

Just cuz he s a billionaire and self made doesn’t absolve him from being a dumpster fire. You wouldn’t make the case that Larry Ellison is taking/took Oracle seriously would you? This shit happens all the time. People get to a certain point and their priorities change. That’s fine, but then don’t pretend like the throne you gave up is still yours. 

 

I remember when people were saying that Buffett should have retired...ironically back in early 2001 when Buffett was in his early 70's. 

 

A well known money manager who worked for Michael Lee-Chin at AIC Funds was sitting next to me at the Berkshire AGM (my first), and said to one of his associates that when he gets back to the office on Monday, he's selling all of the Berkshire in the funds he was managing for AIC...these were his exact words, "Look at these guys, they look nearly dead!"  I had just put my entire net worth in Berkshire B's 14-18 months earlier when it bottomed out at about 0.8 times book!

 

Interestingly enough, I've got about half my net worth in Fairfax stock for the last 14-18 months bought below 0.65 times book, and here we have jokers screaming for Prem to hand over the reins.  Hope history repeats itself!  Cheers! 

[ERICOPOLY]

Companies like to print charts of how their shares measure up to the S&P 500.  They goose the numbers with buybacks.

 

Dividend payers don't deliver less value to shareholders (taxes aside).  They just don't have the boost to their per-share  growth numbers that the buybacks have.

 

Per-share doesn't matter if you can have an offsetting amount of more-shares.

[ERICOPOLY]

If you take the Teledyne folklore and run the numbers again for a joe-sixpack investor on a DRIP in an IRA account, they'll look the same whether it be buyback or dividend.

[ERICOPOLY]

The 'magic' that Prem is doing here isn't buying back stock... it's that he bought back ORH from people like myself and is selling it back to another investor at an even higher multiple.  

 

Buy low and sell high.  I'm wondering why I wasn't paid the same multiple for my ORH shares that he is getting from the new investors.

[ERICOPOLY]

Keep in mind that I had not choice to sell.  To be honest, I was happy with the quick buck.  But not everyone felt that way.  Cardboard was pissed.

Edited November 19, 2021 by ERICOPOLY

[Parsad]

13 minutes ago, matthew2129 said:

Companies that consistently plow a significant portion of their free cash flow to buyback stock instead of issue dividends tend to trade at a premium to their peers b/c having a whale consistently sitting at the bid de-risks the investment and creates a huge tailwind for the price. Do that quarter after quarter, year after year, and the premium becomes permanent. And I'm not talking about the dorks with calculators who only buyback their stock when it's trading at a discount to intrinsic value, I'm talking about the Alpha Chads like AAPL, AZO, NVR ect. who smash the ask and eat themselves every quarter

 

Long-term that only works if the cash flows are consistent or growing.  Buybacks of a business with declining cash flow does not have the same positive effect.  Cheers!

[Parsad]

1 minute ago, ERICOPOLY said:

Keep in mind that I had not choice to sell.

 

Yeah, I was going to remind you of that.    Cheers!

[Gregmal]

3 minutes ago, Parsad said:

 

I remember when people were saying that Buffett should have retired...ironically back in early 2001 when Buffett was in his early 70's. 

 

A well known money manager who worked for Michael Lee-Chin at AIC Funds was sitting next to me at the Berkshire AGM (my first), and said to one of his associates that when he gets back to the office on Monday, he's selling all of the Berkshire in the funds he was managing for AIC...these were his exact words, "Look at these guys, they look nearly dead!"  I had just put my entire net worth in Berkshire B's 14-18 months earlier when it bottomed out at about 0.8 times book!

 

Interestingly enough, I've got about half my net worth in Fairfax stock for the last 14-18 months bought below 0.65 times book, and here we have jokers screaming for Prem to hand over the reins.  Hope history repeats itself!  Cheers! 

People can say whatever they want and time will tell who’s right? But a decade, let alone the most prosperous one in history, is not exactly 1/2/3/ even 5 years of a rough stretch. 
 

Falling back on how much money one has is a lame argument. It’s not hard to accumulate money especially in the finance biz. Results matter and Prems resemble John Paulson… another billionaire who has sucked a big one. When your process is wrong, change, adapt! If it’s just a short term aberration, like Buffet in the late 90s(he didn’t even do that badly then so I don’t know why people use that as an example) then time will prove him right. When it’s been a decade and even Mickey Mouse has outperformed you….and still you stand pat because you’re already rich and stubborn….and then talk a big game but your personally crafted company is overlevered and lacks liquidity and can’t even buy back stock in a real way without gimmicks…..I mean come the freak on!

[ERICOPOLY]

19 minutes ago, matthew2129 said:

Companies that consistently plow a significant portion of their free cash flow to buyback stock instead of issue dividends tend to trade at a premium to their peers b/c having a whale consistently sitting at the bid de-risks the investment and creates a huge tailwind for the price. Do that quarter after quarter, year after year, and the premium becomes permanent. And I'm not talking about the dorks with calculators who only buyback their stock when it's trading at a discount to intrinsic value, I'm talking about the Alpha Chads like AAPL, AZO, NVR ect. who smash the ask and eat themselves every quarter

 

Pumping the stock is a real thing.  

 

I've always said who give a crap if the manager buys back stock at sky-high prices.  YOU WANT THAT!  Would anyone here complain if Prem announced the buyback at $100,000 per share?  Just take the money and laugh.

[ERICOPOLY]

7 minutes ago, Parsad said:

 

Yeah, I was going to remind you of that.    Cheers!

 

I have to say, that on balance I admire Prem.

 

I wish he never mentioned "the great ones" and just did his own thing.

 

I've made my mistakes but I'm a 'speculator' and that's what we do.

 

[ERICOPOLY]

14 minutes ago, Parsad said:

 

Long-term that only works if the cash flows are consistent or growing.  Buybacks of a business with declining cash flow does not have the same positive effect.  Cheers!

 

If you bought back 50% of PDH I could sell 50% of mine.  That's the same as a dividend.  

 

If the manager buys back shares and the shareholder doesn't pay attention and sell an offsetting amount then it constitutes agreement with management.

 

[ERICOPOLY]

1 hour ago, Redskin212 said:

Eric,

 

For those of us who have been around since the short attack almost 20 years ago now - we are pretty much there  

 

Absent the NYSE listing....  grrrr....  where are the call options?

 

I remember I was staying at Waimea Plantation Cottages in June 2006 and I just kept buying calls from their Lanai where they had WiFi.  Every dollar I could scrape together including credit card debt went into those calls.  Now my ex calls me a 'gambler' but happily agreed to keep $2m of her Roth IRA which I grew from $40k.

Edited November 19, 2021 by ERICOPOLY
corrected 2016 with 2006

[ERICOPOLY]

... and she complained that mine grew more than hers (because I was willing to risk my own money in ways that I wouldn't risk hers).  You can't make it up!

[Crip1]

41 minutes ago, ERICOPOLY said:

Cardboard was pissed.

 

I seem to remember that.

 

-Crip

[Cigarbutt]

13 hours ago, modiva said:

This looks similar to margin loan, at least conceptually.  Taking loan against equity.  The difference is that the terms are custom.  The loan amount is very high relative to allowed amounts, and the loan interest is very high relative to the market rate.  Am I missing something?

The bottom line is that they are kind of borrowing to buy back stock. It's possible that this was the most acceptable opportunity concerning regulators and rating agencies who probably frowned upon (or would have frowned upon) a further increase in size of the common-share TRS or further leverage with debt against a lower balance of equity.

i was a shareholder when they partially IPOed ORH a while back and thought they should have done things differently to prevent such scenario but, forgetting sunk costs, once in the situation they were in, it was the most acceptable opportunity.

Contrary to others here, i thought that the valuation multiple used when the minority stake was then 'privatized' was lowish but acceptable and one could always transfer the funds into FFH if the perception was that value had been transferred there. The opportunity cost of the previous ORH financing decision became quite high though given the return (total return) over the period of the public minority ownership existence. Now is different because FFH will have the opportunity to buy back the ORH's minority interest at the same price it is selling it at. The key is the opportunity cost and what will happen in the interim. It looks like both OMERS and FFH got what they wanted from the deal but the uncertainty around the final outcome rests mostly on FFH's side.

The FFH common shares, under most scenarios, are incredibly cheap (still) but FFH didn't always get the financial flexibility right even if it's one of their 'values'.

[Viking]

4 hours ago, Gregmal said:

They have an equity portfolio with tons of garbage that now, much like the likes of pretty much everything in the stock market, has gone up..except they've convinced themselves these are great businesses worth holding onto, and on top of this, this sort of thing is so much part of who Fairfax is, that people have come to terms with this and just kind of accept it.

Greg, when you say ‘tons of garbage’ what specific positions are you referring to? And what makes the position ‘garbage’ in your eyes? Where its performance is going to suck big time in 2022 and 2023?
 

Below are Fairfax’s top 5 ‘equity’ positions representing close to 40% of the equity bucket. What companies on the list are going to perform like garbage in 2022 and 2023? For sure at least 3 of the 5 positions must be complete dogs in your eyes…  Because its the big dogs that will make or break Fairfax’s equity performance (not the tiny positions). 
 

1.) Atlas (13%) is their largest position by far. Piece of shit? Sokol is an idiot. Terrible prospects. Sell it yesterday!

2.) Eurobank? Sell it now! Right when the business is fixed, and the Greek economy is coming out of a decade long depression and the bank is poised to do exceptionally well! Got it!

3.) Blackberry: well ok; you have a point here… but this is one position. And I will readily admit that I really have no idea about its future prospects... So my uninformed view on this company is pretty much useless for others  
4.) Fairfax TRS. Unwind that position NOW! Really? 

5.) Fairfax India. Punt it! Trading at .63xBV? Forget that the management team there is hitting the ball out of the park.

The 5 to 10 positions are only about 16% of the total equity portfolio (small):

6.) BDT Capital Partners: solid long term performing holding. Sell! 

7.) Quess: home run, long term holding, up +100% last 12 months. Woof!

8.) Stelco: sitting on $1billion in cash; star CEO. Punt that puppy!

9.) RFP: US new home construction starting secular bull market. Sell this lumber stock now! 
10.) Recipe: Sell! Right before Canada reopens and restaurant sales take off! 

Edited November 19, 2021 by Viking

[MMM20]

7 minutes ago, Viking said:

Greg, when you say ‘tons of garbage’ what specific positions are you referring to? And what makes the position ‘garbage’ in your eyes? Where its performance is going to suck big time in 2022 and 2023?
 

Below are Fairfax’s top 5 ‘equity’ positions representing close to 40% of the equity bucket. What companies on the list are going to perform like garbage in 2022 and 2023? For sure at least 3 of the 5 positions must be complete dogs in your eyes…  Because its the big dogs that will make or break Fairfax’s equity performance (not the tiny positions). 
 

1.) Atlas (13%) is their largest position by far. Piece of shit? Sell it yesterday?

2.) Eurobank? Sell it now! Right when it is poised to do exceptionally well! Got it!

3.) Blackberry: well ok; you have a point here… but this is one position. 
4.) Fairfax TRS. Unwind that position NOW! Really? 

5.) Fairfax India. Punt it! Trading at .63xBV? Forget that the management team there is hitting the ball out of the park.

The 5 to 10 positions are only about 16% of the total equity portfolio (small):

6.) BDT Capital Partners: solid long term performing holding. Sell! 

7.) Quess: home run, long term holding, up +100% last 12 months. Woof!

8.) Stelco: sitting on $1billion in cash; star CEO. Punt that puppy!

9.) RFP: US new home construction starting secular bull market. Sell this lumber stock now! 
10.) Recipe: Sell! Right before Canada reopens and restaurant sales take off! 

And sell Digit just in case it’s really a 10-50 bagger from here. Wouldn’t want that sort of concentration. The models tell us that’s too risky.