Fairfax 2022

[MMM20]

2 hours ago, newtovalue said:

One concern I have with using book value to look at FFH is the goodwill on the balance sheet.

 

currently goodwill is $5.8 billion or $249 usd per share. If you back this out - Fairfax is trading at price to book of around 1.5x.

 

now I still think it’s super cheap based on earnings power and float - but using book value as a measure doesn’t align with BRK or MKL because they have much more tangible book values.

 

thoughts ?

 

Trading at about half that multiple on an economic basis. The accounting doesnt educate but rather obfuscates when it comes to FFH. This has been the opportunity for at least a couple years now. Stock is trading cheaper to intrinsic value now than at $360 2 years ago.

 

 

Edited November 22, 2022 by MMM20

[newtovalue]

MMM fair points - the accounting on FFH is definitely not easy. 

 

from an economic basis and how much profit per share FFH can/will generate - agree the stock is still grossly undervalued here. tempted to add more - but i'm anchored to my previous purchase prices in the $600s

[glider3834]

10 hours ago, newtovalue said:

One concern I have with using book value to look at FFH is the goodwill on the balance sheet.

 

currently goodwill is $5.8 billion or $249 usd per share. If you back this out - Fairfax is trading at price to book of around 1.5x.

 

now I still think it’s super cheap based on earnings power and float - but using book value as a measure doesn’t align with BRK or MKL because they have much more tangible book values.

 

thoughts ?

BRK is carrying its $134B or so position in Apple as a common stock, so counts toward tangible book, even though on a look through basis Apple mkt cap is approx 47x book value courtesy of its phenomenal earnings power. So most of Apple's mkt cap is goodwill. Similar observations could be made about Coke, Moodys etc 

 

Tangible book is useful yardstick but it has its limitations - I would also focus on earnings power & float 

 

 

[newtovalue]

very good point glider (re: AAPL on BRK balance sheet). learn something new everyday!

[glider3834]

1 hour ago, newtovalue said:

very good point glider (re: AAPL on BRK balance sheet). learn something new everyday!

[Viking]

16 hours ago, newtovalue said:

One concern I have with using book value to look at FFH is the goodwill on the balance sheet.

 

currently goodwill is $5.8 billion or $249 usd per share. If you back this out - Fairfax is trading at price to book of around 1.5x.

 

now I still think it’s super cheap based on earnings power and float - but using book value as a measure doesn’t align with BRK or MKL because they have much more tangible book values.

 

thoughts ?

@newtovalue good question. I like to look at multiple measures when valuing any company. My primary method is earnings. When it comes to insurers, book value appears to also be super important (for insurance analysts and other investors). 
 

Of course all methods have their weaknesses. For example, where the earnings are coming from is important: asset revaluation (happens a lot with Fairfax) or from underwriting and/or interest and dividend income? One of the reasons i like Fairfax so much right now is the quality of the earnings coming in 2023 is very high: primarily underwriting profit and interest and dividend income, with a smattering of realized gains (like pet insurance and Resolute sales in 2022). 
 

Book value is hard with a 37 year old company like Fairfax. They have bought so many companies over the years and nurtured many of them for decades. None of the insurance companies they purchased over the years come close to resembling the businesses they are today (except perhaps Zenith). Most were poorly run (the pre-2000 purchases), with CR usually over 100; Fairfax probably bought them to get their float. Today pretty much all the insurance companies are very well run, many now with large specialty businesses, with CR’s well under 100. They have all grown nicely over the years and their earnings power has increased significantly. 
 

Part of the problem at Fairfax is the equity hedges eviscerated billions of earnings from 2010-2017 (with a final $500 million loss in 2020 when the last short position was finally closed). The insurance operations significantly increased in quality and size from 2010-2020 and little of this earnings potential is captured in BV today. 
 

As an example, Fairfax just sold an asset (small pet insurance business) for $1.4 billion and booked a pre-tax gain of close to $1.3 billion… a big miss for reported BV. My guess is Fairfax has lots of other assets that are worth much more than the value they are currently captured at in Fairfax’s reported BV. And a few more will be likely be sold in 2023 and some nice realized gains will be booked.

 

I have been saying for some time now (I likely sound like a broken record) that Fairfax’s past results tell an investor very little about what Fairfax’s future results will be. There is too much noise in past results. That is why i focus so much on understanding each of the businesses Fairfax owns as they exist today. And what each of those businesses are likely to earn in 2023 and 2024.  
 

The turnaround at Fairfax was largely completed in 2019. In 2020, covid threw a wrench into the progress that Fairfax had been making. However, in 2021 Fairfax came roaring back and delivered an outstanding year. In 2022 the greatest bear market in bonds happened and, surprise, surprise, Fairfax will likely finish the year with a small profit. Pretty impressive. Despite the economic backdrop, 2023 is poised to be a very good year for Fairfax. The super tanker has turned, is going in the right direction and is picking up speed. We will see.

Edited November 23, 2022 by Viking

[UK]

I agree. Nothing is certain 100 per cent, but I think it is more likely than not, that FFH shares could return 2x in 2-3 years just based on very good analysis/assumptions provided by Viking. I think the market is still to slow to recognize all these changes of the last few years and FFH I think is still underowned and underfollowed (at least in other places than COBF:)) and if they will deliver (nothing heroic but no nonsense also) it could easily trade at 1.5 BV or 10-12 earnings and at that range it would only be a fair value.

 

Edited November 23, 2022 by UK

[Luke]

Put in a buy order for Fairfax. I agree it looks undervalued and it could be a interesting long term holding

[newtovalue]

great points Viking - and thank you for all your knowledge sharing on this site! 

 

FFH is already my largest position - but this board is making a lot of great points tempted to add more here. Normally don't like to forecast a stock doubling - but with FFH its not out of the realm of possibilities if they earn $150 CAD a share and trade at 10x.

[Viking]

When I did my last update on Fairfax's earnings estimates for 2023 a couple of days ago, I noticed my spreadsheet had bunch of errors in it (mostly the historical information). I also: 

- added a few more years of history

- added 2022 YTD numbers (to help forecast 2022 YE)

- made a few tweaks to my 2022 & 2023 estimates 

----------

Below is a short summary of what is included in each row.

1.) underwriting profit: is just insurance and reinsurance. Not runoff and life insurance (which is captured a couple of lines down).

2.) interest and dividends: for all of Fairfax

3.) share of profit of associates: for all of Fairfax; includes associate equity, real estate and insurance holdings

4.) life insurance and runoff: just underwriting results

5.) Other: captures Fairfax's consolidated equity holdings

6.) Interest expense: for all of Fairfax

7.) Corporate overhead

8.) Net gains (losses) on investments: captures realized and unrealized gains on Fairfax's fixed income and mark to market equity holdings (including derivatives like the TRS on FFH)

10.) Non-controlling interests: primarily the parts of Allied, Odyssey and Brit that Fairfax does not own

 

I am least confident in my estimates for two buckets: Non-controlling interests and Income taxes. 

 

----------

Below is a summary of Fairfax's equity holdings broken out by size and accounting treatment.  

A.) Mark to market is captured in 8.) Net gains (losses) on investments

B.) Associates is captured in 3.) Share of profit of associates

C.) Consolidated is captured in 5.) Other (revenue - expenses)

 

 

Edited November 24, 2022 by Viking

[Viking]

7 hours ago, newtovalue said:

great points Viking - and thank you for all your knowledge sharing on this site! 

 

FFH is already my largest position - but this board is making a lot of great points tempted to add more here. Normally don't like to forecast a stock doubling - but with FFH its not out of the realm of possibilities if they earn $150 CAD a share and trade at 10x.

@newtovalue you are welcome. Nice to hear that others find value in some of the posts. I use writing as a way to get my thoughts in order. And i love it when people take the other side as i spend a fair bit of time trying to figure out why i am wrong. I think my track record is pretty decent figuring out the earnings part of the equation. I am pretty terrible at figuring out the multiple expansion part of the equation (i tend to sell my big positions too early). 

[maxthetrade]

6 hours ago, Viking said:

Nice to hear that others find value in some of the posts. I use writing as a way to get my thoughts in order. And i love it when people take the other side as i spend a fair bit of time trying to figure out why i am wrong. I think my track record is pretty decent figuring out the earnings part of the equation. I am pretty terrible at figuring out the multiple expansion part of the equation (i tend to sell my big positions too early). 

 

I certainly appreciate your posts! My earnings estimate is somewhat lower, main difference is that I assume $1,000 UW profit and I have share of profits of associates a bit lower, but haven't updated that number lately. I also don't include gains on the equity portfolio until they show up. But that's just because I like to err on the side of caution. If we see an average catastrophe year and calm markets your estimate is entirely reasonable. 

[Xerxes]

If I am not mistaken we are hitting all time highs !

[UK]

9 hours ago, Xerxes said:

If I am not mistaken we are hitting all time highs !

 

 

[petec]

On 11/22/2022 at 11:44 PM, glider3834 said:

BRK is carrying its $134B or so position in Apple as a common stock, so counts toward tangible book, even though on a look through basis Apple mkt cap is approx 47x book value courtesy of its phenomenal earnings power. So most of Apple's mkt cap is goodwill. Similar observations could be made about Coke, Moodys etc 

 

I'm not sure that's the right way to think about this. Those are all common stock positions that could be liquidated tomorrow, at which point they'd become the most tangible asset of all. They're also high-quality capital-light businesses that are clearly worth more than BV.

 

FFH's intangibles are mainly the result of having bought insurance businesses. If those businesses were sold today they'd almost certainly sell for more than BV, so BV understates their value. But some of the excess of economic value over TBV is already captured in the goodwill, so the premium over BV wouldn't be as big as it would be for a similar business that had been built organically and had no BV.

 

I think newtovalue is absolutely right that if you are comparing the multiples of FFH, MKL, and BRK you should do so on a TBV basis not a BV basis.

 

I also think Viking is right that it's better to look at earnings. The issue there is that given the nature of their investments, FFH's earnings are less predictable than MKL's or BRK's, so the market will probably give them a lower multiple.

 

Still, I think there is real value in both the earnings power and the optionality in some of the investments and FFH is my biggest position.

[Viking]

Fairfax has a number of significant tailwinds driving earnings higher. I have spent a fair bit of time posting on underwriting profit and interest and dividend income. There is a third item that is also spiking higher in 2022: share of profit of associates. Please note: I am not an accountant; I would appreciate it if other posters would point out any errors below (as I post to learn just like every else on this board… and I have thick skin!). I view this post as kind of a working paper... likely subject to lots of corrections/revisions.

----------

Over the 5 year period, from 2017-2021, ‘share of profit of associates’ averaged about $200 million per year for Fairfax. This year (2022) it should come in at around $1 billion for the full year. This surprised me. That is a big increase over the trend from the past few years. 2022 MUST BE an outlier and Fairfax should settle back to something closer to $200 million in 2023… right? Wrong. My guess is ‘share of profits of associates’ should be able to deliver around $1 billion again in 2023 and this number should actually grow nicely in the coming years. It’s like Fairfax in 2022 has magically found an incremental $35/share pre-tax ($800 million increase / 23.5 million shares). And this number could compound at +10% every year moving forward.

 

That is a staggering increase in a very short period of time. What happened? Put simply, the earnings power of the equity holdings captured in the ‘associates-equity accounted’ bucket are beginning to shine through. The turnarounds have (finally) turned around (Eurobank). The fast growers are executing well (like Atlas). The commodity bull is running (Resolute, Stelco, EXCO).

- Eurobank

- Altas

- Resolute Forest Products (will come out when sale closes in 1H 2023)

- Stelco (will be added in Q4)

- EXCO Resources

- Bangalore Airport

- Peak Achievement (Bauer hockey; 25% of Rawlings/Easton)

- Quess

- Kennedy Wilson Partnerships

- Grivalia Hospitality (moved to ‘consolidated equities’ in Q4)

- Other: Helios Fairfax, Astarta, IIFL Securities and more

—————

What is ‘share of profits of associates’? Let’s start by looking at the big picture. Fairfax has an equity portfolio of about $15 billion. The accounting rules for these holdings can be confusing for investors to understand.

 

From Fairfax’s 2020AR: “What we find useful in clarifying the accounting positions is to separate these common stockholdings into three buckets. Generally, for positions:

A.) where we hold less than a 20% economic interest and no control, we mark to market

B.) where we have an economic interest of 20% or more but no control (these holdings are called associates), we equity account

C.) where we have control or an economic interest above 50%, we consolidate.”

 

 

When Fairfax reports each quarter the specific results from each of their individual equity holdings will flow though the income statement and balance sheet in different ways depending on which bucket above the holding falls in to.

 

Impact on income statement:

A.) Mark to Market: Net gains (losses) on investments

B.) Associates: Share of profit of associates

C.) Consolidated: Other revenue & Other expenses

 

Any dividends paid to Fairfax by any equity holding will show up in: Interest and dividends

 

At Nov 23, roughly $5.6 billion, or 38%, of Fairfax’s $15 billion equity type holdings fall into the ‘Associates’ bucket. This $5.6 billion in equities will generate about $1 billion (pre-tax) in ‘share of profits of associates’ plus whatever is paid out over the year in dividends in the ‘interest and dividends’ bucket.

----------

Please note, in the table above, I have included the FFH total return swaps, debenture and warrant holdings in the ‘mark to market’ bucket.

—————

From page 50, Fairfax 2021AR: Investments in associates

 

Investments in associates are accounted for using the equity method and are comprised of investments in corporations, limited partnerships and trusts where the company has the ability to exercise significant influence but not control. An investment in associate is initially recognized at cost and adjusted thereafter for the post- acquisition change in the company’s share of net assets of the associate. The company’s share of profit (loss) and share of other comprehensive income (loss) of associates are reported in the corresponding lines in the consolidated statement of earnings and consolidated statement of comprehensive income, respectively.

Edited November 28, 2022 by Viking

[returnonmycapital]

But what will Fairfax do about C.) Consolidated?

 

Don't mean to be a downer but returns on capital have been almost non-existent for the group. Last year, operating earnings (pre-interest expense) were something less than $3/share. Things don't look a lot different this year and any interest expense/taxes aren't part of those figures. Equity is valued at almost $100/share. With things looking decent everywhere else, surely some attention will come to this basket.

 

With the take private, will Fairfax's treatment of Atlas be to consolidate or do they stick with equity method?

[Thrifty3000]

On 11/24/2022 at 1:01 AM, Viking said:

When I did my last update on Fairfax's earnings estimates for 2023 a couple of days ago, I noticed my spreadsheet had bunch of errors in it (mostly the historical information). I also: 

- added a few more years of history

- added 2022 YTD numbers (to help forecast 2022 YE)

- made a few tweaks to my 2022 & 2023 estimates 

----------

Below is a short summary of what is included in each row.

1.) underwriting profit: is just insurance and reinsurance. Not runoff and life insurance (which is captured a couple of lines down).

2.) interest and dividends: for all of Fairfax

3.) share of profit of associates: for all of Fairfax; includes associate equity, real estate and insurance holdings

4.) life insurance and runoff: just underwriting results

5.) Other: captures Fairfax's consolidated equity holdings

6.) Interest expense: for all of Fairfax

7.) Corporate overhead

8.) Net gains (losses) on investments: captures realized and unrealized gains on Fairfax's fixed income and mark to market equity holdings (including derivatives like the TRS on FFH)

10.) Non-controlling interests: primarily the parts of Allied, Odyssey and Brit that Fairfax does not own

 

I am least confident in my estimates for two buckets: Non-controlling interests and Income taxes. 

 

----------

Below is a summary of Fairfax's equity holdings broken out by size and accounting treatment.  

A.) Mark to market is captured in 8.) Net gains (losses) on investments

B.) Associates is captured in 3.) Share of profit of associates

C.) Consolidated is captured in 5.) Other (revenue - expenses)

 

 

 

@Viking I'm not an accountant by any stretch. One thing jumped out at me. In section 8. there's an assumption of a 5% gain on the entire equity portfolio. Are you assuming the value of the non-mark to market equities will be revised upward or profitably divested over time? Otherwise, I'm curious if expecting $750 from the equities is a bit aggressive if the $6,851 mtm portfolio will have to produce the lion's share of that growth.

 

 

Edited November 28, 2022 by Thrifty3000

[Viking]

27 minutes ago, returnonmycapital said:

But what will Fairfax do about C.) Consolidated?

 

Don't mean to be a downer but returns on capital have been almost non-existent for the group. Last year, operating earnings (pre-interest expense) were something less than $3/share. Things don't look a lot different this year and any interest expense/taxes aren't part of those figures. Equity is valued at almost $100/share. With things looking decent everywhere else, surely some attention will come to this basket.

 

With the take private, will Fairfax's treatment of Atlas be to consolidate or do they stick with equity method?

@returnonmycapital my guess is Bucket c.) will be a small good news story in 2023 with pre-tax earnings increasing to $250 million or so. Not earth shattering… but a solid improvement from the past 5 year average. What i am focussed on with all the line items on Fairfax’s income statement is the change: are each of the line items shrinking, staying the same or increasing in size (and how much). 
 

Recipe (hit hard by covid) is the biggest holding by far. I think it could deliver +$125 million in pre-tax earnings. Grivalia Hospitality just moved to bucket C.) and this should help. Fairfax India and Thomas Cook (hit hard by covid) should do well. Dexterra is fixing its modular business so its results should improve moving forward. Farmers Edge was written down (impacting 2022 results for the group), although we could see another write down here.

[Viking]

1 hour ago, Thrifty3000 said:

 

@Viking I'm not an accountant by any stretch. One thing jumped out at me. In section 8. there's an assumption of a 5% gain on the entire equity portfolio. Are you assuming the value of the non-mark to market equities will be revised upward or profitably divested over time? Otherwise, I'm curious if expecting $750 from the equities is a bit aggressive if the $6,851 mtm portfolio will have to produce the lion's share of that growth.

 

 

@Thrifty3000  good question. For 8.) Net Gains on Investments, I am assuming most of the $750 million gain in 2023 will be primarily from mark to market stocks/TRS. i am also assuming Fairfax will monetize at least a few assets and realize some sizeable gains on sale.
 

The mark to market equities have been severely marked down in 2022… that will help future returns. The wild card is asset sales (leading to sizeable gains) and my guess is we will see more happening in 2023.

Edited November 28, 2022 by Viking

[Viking]

18 hours ago, Viking said:

Fairfax has a number of significant tailwinds driving earnings higher. I have spent a fair bit of time posting on underwriting profit and interest and dividend income. There is a third item that is also spiking higher in 2022: share of profit of associates. Please note: I am not an accountant; I would appreciate it if other posters would point out any errors below (as I post to learn just like every else on this board… and I have thick skin!). I view this post as kind of a working paper... likely subject to lots of corrections/revisions.

----------

Over the 5 year period, from 2017-2021, ‘share of profit of associates’ averaged about $200 million per year for Fairfax. This year (2022) it should come in at around $1 billion for the full year. This surprised me. That is a big increase over the trend from the past few years. 2022 MUST BE an outlier and Fairfax should settle back to something closer to $200 million in 2023… right? Wrong. My guess is ‘share of profits of associates’ should be able to deliver around $1 billion again in 2023 and this number should actually grow nicely in the coming years. It’s like Fairfax in 2022 has magically found an incremental $35/share pre-tax ($800 million increase / 23.5 million shares). And this number could compound at +10% every year moving forward.

 

That is a staggering increase in a very short period of time. What happened? Put simply, the earnings power of the equity holdings captured in the ‘associates-equity accounted’ bucket are beginning to shine through. The turnarounds have (finally) turned around (Eurobank). The fast growers are executing well (like Atlas). The commodity bull is running (Resolute, Stelco, EXCO).

- Eurobank

- Altas

- Resolute Forest Products (will come out when sale closes in 1H 2023)

- Stelco (will be added in Q4)

- EXCO Resources

- Bangalore Airport

- Peak Achievement (Bauer hockey; 25% of Rawlings/Easton)

- Quess

- Kennedy Wilson Partnerships

- Grivalia Hospitality (moved to ‘consolidated equities’ in Q4)

- Other: Helios Fairfax, Astarta, IIFL Securities and more

—————

What is ‘share of profits of associates’? Let’s start by looking at the big picture. Fairfax has an equity portfolio of about $15 billion. The accounting rules for these holdings can be confusing for investors to understand.

 

From Fairfax’s 2020AR: “What we find useful in clarifying the accounting positions is to separate these common stockholdings into three buckets. Generally, for positions:

A.) where we hold less than a 20% economic interest and no control, we mark to market

B.) where we have an economic interest of 20% or more but no control (these holdings are called associates), we equity account

C.) where we have control or an economic interest above 50%, we consolidate.”

 

 

When Fairfax reports each quarter the specific results from each of their individual equity holdings will flow though the income statement and balance sheet in different ways depending on which bucket above the holding falls in to.

 

Impact on income statement:

A.) Mark to Market: Net gains (losses) on investments

B.) Associates: Share of profit of associates

C.) Consolidated: Other revenue & Other expenses

 

Any dividends paid to Fairfax by any equity holding will show up in: Interest and dividends

 

At Nov 23, roughly $5.6 billion, or 38%, of Fairfax’s $15 billion equity type holdings fall into the ‘Associates’ bucket. This $5.6 billion in equities will generate about $1 billion (pre-tax) in ‘share of profits of associates’ plus whatever is paid out over the year in dividends in the ‘interest and dividends’ bucket.

----------

Please note, in the table above, I have included the FFH total return swaps, debenture and warrant holdings in the ‘mark to market’ bucket.

—————

From page 50, Fairfax 2021AR: Investments in associates

 

Investments in associates are accounted for using the equity method and are comprised of investments in corporations, limited partnerships and trusts where the company has the ability to exercise significant influence but not control. An investment in associate is initially recognized at cost and adjusted thereafter for the post- acquisition change in the company’s share of net assets of the associate. The company’s share of profit (loss) and share of other comprehensive income (loss) of associates are reported in the corresponding lines in the consolidated statement of earnings and consolidated statement of comprehensive income, respectively.

 

As a follow up to my previous post, below is a fairly detailed build of what holdings are included in 'share of profit of associates' when Fairfax reports. The information by company is incomplete - but it is pretty complete for the larger holdings, which is what matters. I have gone through and pulled what information I could find in previous AR's.

 

If we focus on the big rocks we can see the path to Fairfax getting to $1 billion (and higher) in 'share of profits of associates' in 2023 and future years. Four companies will likely drive 80% of the total: Eurobank, Altas, EXCO and Stelco. 

----------

You can also reverse engineer the numbers below by looking at the reported results of the individual holdings. My understanding is the number Fairfax reports is roughly the pre-tax operating earnings less dividends paid - as reported by the individual holdings - adjusted for Fairfax's ownership percent ('Fairfax's share'). Please correct me if I am wrong. 

----------

When companies were added/removed to this bucket of holdings is also relevant. I think Altas was added in 2018. Eurobank was added Jan 2020. Eurolife was removed in 2021. Stelco will be added in Q4, 2022, now that Fairfax owns over 20% (24%). Grivalia Hospitality will be removed in Q4, 2022 and will move to the 'consolidated' bucket given Fairfax's increase in ownership to 80%. Resolute will be removed in 1H 2023 when its sale closes. 

----------

What a home run Eurolife has become. My guess is Fairfax has likely made enough money on this one purchase to offset all the losses from the poor investments listed below.

---------

You can also see the fix for many of Fairfax's poor investments:

- APR: sold to Atlas who is slowly turning that ship (lots of work left to do but Altas is way better positioned to execute on this)

- Farmers Edge: moved to 'consolidated'; a big +$100 million write down this year. Likely on its way to zero (not far away now). 

- AGRFI/Atlas Mara/Other Africa: I think these have been sold or largely written down? Helios looks like the real deal... although it will take 5 years to likely see material progress (which is fine).

Bottom line, most of the problem children holdings in this bucket have been dealt with. And the big dogs look like they will be barking loudly in 2023 and delivering good to very good results for Fairfax.

 

Edited November 28, 2022 by Viking

[Thrifty3000]

I did some rough math on whether buybacks are better than increasing premiums.

 

Looks to me like buybacks are the winner while share prices and interest rates are around the current levels.

 

My rough logic:

 

If FFH has a spare $1 billion should it write premiums or buy back shares?

 

Premiums: With $1 bil in a hard market it can write $1.5 bil in premiums and invest the float. Let’s assume 95 CR and around 4% interest on invested float. Let’s call it around $120 million of pre-tax earnings potential. Divide that by 23 million shares and the pre-tax earnings per share is roughly $5.

 

Buybacks: With $1 bil FFH could buy back about 1.66 million shares at $600 USD per share. If we assume $2 billion of earnings potential then the buyback would increase earnings potential per share from roughly $85 per share pre buy back to around $92 per share post buy back. A $7 per share increase.

 

$7 per share from buybacks > $5 per share from insurance so by my math buybacks wins.

[Xerxes]

Math / mental gymnastic question:

 

We know that mathematically (in a tax-free environment), a $1 of dividend, re-invested by shareholder for more shares will have an identical effect on EPS to a buyback by the company. 
 

Knowing that, a dividend will in fact give optionality to the shareholder to decide to increase exposure or not. Whereas a buyback doesn’t give that optionality.
 

Now bringing this to FFH, on this hypothetical $1 billion of surplus at this point in time. Why should it not be disbursed as “special dividend” for the shareholder to chose to buy more shares or not.
 

A buyback based on the company thesis of discount to intrinsic value forces a certain fixed outcome. A re-invested dividend, allows each shareholder executing on their specific view of intrinsic value and their desire for margin of safety to it. 
 

I think there is a certain mental view that a dividend is just money wasted whereas buyback below intrinsic value is not. That shouldn’t matter from a shareholder point of view (tax-free environment). In both cases, $1 billion leaves the company coffers never to be seen again.  
 

 

Edited November 29, 2022 by Xerxes

[dartmonkey]

A buyback based on the company thesis of discount to intrinsic value forces a certain fixed outcome. A re-invested dividend, allows each shareholder executing on their specific view of intrinsic value and their desire for margin of safety to it. 
 

I think there is a certain mental view that a dividend is just money wasted whereas buyback below intrinsic value is not. That shouldn’t matter from a shareholder point of view (tax-free environment). In both cases, $1 billion leaves the company coffers never to be seen again.

 

I think you can see it both ways. If it's a dividend, the dividend receiver is free to buy more shares, if she thinks they are cheap. If it's a buyback, the shareholder is free to sell some shares, if he thinks they are expensive. In both cases, some shareholders will be happy (because the company did the transaction they approve), and some will be forced to do their preferred transaction themselves. 

 

For my part,, I think the company should repurchase shares, because the company feels they are cheap, and shareholders that disagree should be selling their shares anyways.

[Thrifty3000]

2 hours ago, Xerxes said:

Math / mental gymnastic question:

 

We know that mathematically (in a tax-free environment), a $1 of dividend, re-invested by shareholder for more shares will have an identical effect on EPS to a buyback by the company. 
 

Knowing that, a dividend will in fact give optionality to the shareholder to decide to increase exposure or not. Whereas a buyback doesn’t give that optionality.
 

Now bringing this to FFH, on this hypothetical $1 billion of surplus at this point in time. Why should it not be disbursed as “special dividend” for the shareholder to chose to buy more shares or not.
 

A buyback based on the company thesis of discount to intrinsic value forces a certain fixed outcome. A re-invested dividend, allows each shareholder executing on their specific view of intrinsic value and their desire for margin of safety to it. 
 

I think there is a certain mental view that a dividend is just money wasted whereas buyback below intrinsic value is not. That shouldn’t matter from a shareholder point of view (tax-free environment). In both cases, $1 billion leaves the company coffers never to be seen again.  
 

 

Don’t forget FFH is the Watsa Family Office disguised as a public company.
 

FFH is the Watsas’ investment vehicle. Excess cash will stockpile and be deployed in the investment vehicle in the most tax efficient way.

 

If what’s best for the Watsas is good for you then all is well.

Edited November 29, 2022 by Thrifty3000