Fairfax 2024

[SafetyinNumbers]

Starting this up so we don’t have a new topic for every press release like this morning’s 50% increase in the dividend.

 

 

[UK]

Nice start of the year!:)

[MMM20]

Maybe now Mr Market starts paying more attention to the structurally higher earnings power. 

 

Edited January 3 by MMM20

[Malmqky]

Would rather have buybacks but whatever. I’m sure some people will appreciate this.

[Xerxes]

This is “signalling” more than anything else. And giving something tangible back to long term holders. Even more reason to stay around. 
 

Go back 25 years the dividend use to be $5 USD. At one point it was raised to $10 USD, and it stayed there, when the company was able to sustain a higher payout. 
 

I cannot complain on a job well done. 

[TwoCitiesCapital]

2 hours ago, Xerxes said:

This is “signalling” more than anything else. And giving something tangible back to long term holders. Even more reason to stay around. 
 

Go back 25 years the dividend use to be $5 USD. At one point it was raised to $10 USD, and it stayed there, when the company was able to sustain a higher payout. 
 

I cannot complain on a job well done. 

 

 

I'd also prefer buybacks, but will not complain about structurally higher dividends signalling structurally higher earnings. 

 

Especially on something as small as $5/sh differential

[Parsad]

I think Prem's done a fantastic job of buying back shares when they were cheap and then distributing capital to shareholders through dividends.  I was expecting some sort of increase to the dividend, but 50% is huge and he obviously believes it is comfortably sustainable.

 

The man probably has to replenish his non-FFH $150M war chest after committing it all to Fairfax shares during the pandemic.  He also has not received any sort of salary increase since what...the year 2000!

 

Thanks Prem!  Cheers!

[Daphne]

Sanjeev might recently introduced 2% Canadian buyback tax have tempered the attractiveness of buybacks?

[Parsad]

10 minutes ago, Daphne said:

Sanjeev might recently introduced 2% Canadian buyback tax have tempered the attractiveness of buybacks?

 

Hi Daphne,

 

Happy New Year!

 

Yes, combined with the increase in valuation, they probably want to spread the wealth as buybacks solely aren't as attractive as when the stock was much cheaper...continue their usual 3-year buyback program and increase the dividend.

 

Shareholders have to remember that there are a lot of employees who own Fairfax shares.  The dividend is their income without having to sell significant portions of FFH as they retire.

 

Cheers!

[Hamburg Investor]

4 hours ago, TwoCitiesCapital said:

 

 

I'd also prefer buybacks, but will not complain about structurally higher dividends signalling structurally higher earnings. 

 

Especially on something as small as $5/sh differential

Agree with everything. With structural earnings around 150 dollar, we are now at a payout ratio of 10% and an earnings yield of 1.6%. At these price levels personally I‘d be more happy with putting those 15 dollars/year extra into buybacks. But if they still want to be recognized as a dividend player, well than they‘d had to adjust it some day. 

[Munger_Disciple]

I think the dividend is a poor capital allocation decision by Prem. I would have preferred (1) buyback or (2) no dividend, retain the capital inside the business on which they can hopefully earn decent returns and have it compound inside the company without any taxes. 

Dividend forces all shareholders (whether they have a need or not) to either spend or reinvest only 70-75% (lesser in case of shareholders in higher income brackets in states like CA or NY) of the cash proceeds after paying the tax due. It is an inefficient way to return capital to shareholders. Those shareholders who need cash can always sell a portion of their holding to meet the need in a more tax efficient way because one pays less in capital gains taxes than dividends which are equivalent to zero cost basis capital gains. 

Let us do some math: FFH has roughly 23 million shares outstanding which implies $345mm dividend payment before taxes. Let us assume 75% of shareholders own it in taxable accounts and dividend tax rate is 25%. This means that FFH shareholders are paying $65mm in taxes cumulatively to the govt out of $345mm for almost no reason. 

 

If Prem need cash for his living expenses, I would respectfully suggest one of two far better alternatives available to him: (1) Buyback $345 mm worth of stock and he can sell his pro-rata shares, thus retaining the same % economic ownership in FFH. Given the relatively tiny numbers involved, his voting % would hardly change. Other shareholders who need cash can do the same as Prem. Alternatively, (2) FFH board can pay Prem (as an example) $10mm yearly salary and the company retains remaining capital of $335mm inside the company and let it compound. Shareholders come out $55mm ahead in this case using the assumptions stated before and they don't need to worry about reinvesting the tax-inefficiently distributed capital. 

 

I realize nothing will likely change, but math & logic clearly show the sub-optimality of this capital allocation decision.   

 

 

Edited January 3 by Munger_Disciple

[TwoCitiesCapital]

26 minutes ago, Munger_Disciple said:

I think the dividend is a poor capital allocation decision by Prem. I would have preferred (1) buyback or (2) no dividend, retain the capital inside the business on which they can hopefully earn decent returns and have it compound inside the company without any taxes. 

Dividend forces all shareholders (whether they have a need or not) to either spend or reinvest only 70-75% (lesser in case of shareholders in higher income brackets in states like CA or NY) of the cash proceeds after paying the tax due. It is an inefficient way to return capital to shareholders. Those shareholders who need cash can always sell a portion of their holding to meet the need in a more tax efficient way because one pays less in capital gains taxes than dividends which are equivalent to zero cost basis capital gains. 

Let us do some math: FFH has roughly 23 million shares outstanding which implies $345mm dividend payment before taxes. Let us assume 75% of shareholders own it in taxable accounts and dividend tax rate is 25%. This means that FFH shareholders are paying $65mm in taxes cumulatively to the govt out of $345mm for almost no reason. 

 

If Prem need cash for his living expenses, I would respectfully suggest one of two far better alternatives available to him: (1) Buyback $345 mm worth of stock and he can sell his pro-rata shares, thus retaining the same % economic ownership in FFH. Given the relatively tiny numbers involved, his voting % would hardly change. Other shareholders who need cash can do the same as Prem. Alternatively, (2) FFH board can pay Prem (as an example) $10mm yearly salary and the company retains remaining capital of $335mm inside the company and let it compound. Shareholders come out $55mm ahead in this case using the assumptions stated before and they don't need to worry about reinvesting the tax-inefficiently distributed capital. 

 

I realize nothing will likely change, but math & logic clearly show the sub-optimality of this capital allocation decision.   

 

 

 

1. We're aware of how every Buffet/Munger acolyte feels about dividends. Everyone has heard/had this debate about ANY company paying ANY dividend 1000 times. Dividends will still be paid by companies, and other than the odd exception like Berkshire (and perhaps Fairfax), history bears out that the dividend is better because most companies DON'T reinvest the proceeds optimally over time. 

 

2. Why are you assuming 75% of shareholder base is taxable? My understanding is biggest players in markets are pensions (not taxable). A little further down the list you have the aggregate of retirement savings that are also not taxable. Assuming Fairfax shareholding skews to the average, I'd guess that at least half of it is in tax-free accounts?

 

3a. 25%? Can't speak for Canadian tax rates, but US tax rates on qualified dividends are 0% or 15% unless if you're making more than ~500k.

 

3b. If you're making 500k and don't have better things to do then b*tch about buybacks vs dividends because of the small impact of taxes versus compounded returns over a reasonably finite time frame, then you're definitely living life wrong....

Edited January 3 by TwoCitiesCapital

[Munger_Disciple]

12 minutes ago, TwoCitiesCapital said:

 

1. We're aware of how every Buffet/Munger acolyte feels about dividends. Everyone has heard/had this debate about ANY company paying ANY dividend 1000 times. Dividends will still be paid by companies, and other than the odd exception like Berkshire (and perhaps Fairfax), history bears out that the dividend is better because most companies DON'T reinvest the proceeds optimally over time. 

 

2. Why are you assuming 75% of shareholder base is taxable? My understanding is biggest players in markets are pensions (not taxable). A little further down the list you have the aggregate of retirement savings that are also not taxable. Assuming Fairfax shareholding skews to the average, I'd guess that at least half of it is in tax-free accounts?

 

3a. 25%? Can't speak for Canadian tax rates, but US tax rates on qualified dividends are 0% or 15% unless if you're making more than ~500k.

 

3b. If you're making 500k and don't have better things to do then b*tch about buybacks vs dividends because of the small impact of taxes versus compounded returns over a reasonably finite time frame, then you're definitely living life wrong....

 

1. Why not buyback? Are you worried that FFH will blow both reinvestment and buybacks? Then you should sell all your FFH shares instead of having an orgasm about dividends. 

 

2. That was just a guess. 

 

3a. In the US, the highest dividend tax rate is 20%+3.8% Obamacare surcharge = 23.8% at the federal level. Then you have to add state taxes which vary from 0% to 13.3% depending on where you live.

 

3b. Stop being an a$$ and stop treating others you disagree with disrespectfully & get back to rational and logical arguments to make your case. 

 

[TwoCitiesCapital]

33 minutes ago, Munger_Disciple said:

 

1. Why not buyback? Are you worried that FFH will blow both reinvestment and buybacks? Then you should sell all your FFH shares instead of having an orgasm about dividends. 

 

2. That was just a guess. 

 

3a. In the US, the highest dividend tax rate is 20%+3.8% Obamacare surcharge = 23.8% at the federal level. Then you have to add state taxes which vary from 0% to 13.3% depending on where you live.

 

3b. Stop being an a$$ and stop treating others you disagree with disrespectfully & get back to rational and logical arguments to make your case. 

 

 

Yes, 23.8% if you're making above 490k on an individual tax rate. Hence my comments about b*tching about a fraction of a % differential if you're making 500k+. 

 

Point is, everytime this company, and others, pays a dividend, this whole argument gets rehashed - and it's hardly worthwhile because history bears out that dividends make sense for MOST companies. 

 

Regardless of what I believe in Fairfax, I have to recognize the market is regularly wrong IF the primary source of returns has been the "inefficient" dividend. This HAS been true for MOST of the return in MOST of stocks across stocks market history.

 

Do I think Fairfax is the exception to that rule? Sure. But doesn't everyone believe that about every company they own? And that surely can't all be right! So I'm perfectly fine taking a dividend to hedge the case that I'm wrong. 

 

Prem made excellent capital allocations with the buy backs, the TRS, and the interest rate cycle. Decisions 10-100x more impactful than this one. I'm not gonna bitch about the potential taxes a handful of highly compensated people may pay because they upped the dividend by 0.5%...

 

And let's keep in mind, Prem is the largest of those people

 

 

Edited January 3 by TwoCitiesCapital

[Viking]

I love the 50% increase in the dividend to $15 (it had been at US$10 forever). Fairfax has paid a dividend for many years - and it is not going to stop (now that would be an idiotic thing to do). The fact Fairfax modestly increased the dividend should also not come a surprise to anyone. As was mentioned upthread, the payout ratio remains very low at 9% ($15 / $170 earnings in 2023). Yes, the increase of 50% looks dramatic - but let’s be honest, the amount is small potatoes in the big scheme of things ($5 for a company that is likely earning $170).
 

Total shareholder return at Fairfax (buybacks + dividends) has been very high at Fairfax for the past 5 years. Fairfax HAS delivered on the share buyback front - especially if you include the FFH-TRS position. Capital allocation, in general, has been excellent.

 

I can understand that some investors might not like dividends. There is an easy answer - stick to stocks that don’t pay a dividend. 
 

But the simple truth is lots of well run companies also pay a modest dividend. Lots of P/C insurers pay a dividend. Are they all idiots? I don’t think so. 
 

Fairfax is still trying to repair its image. This effort is going to take years. They are going to need to execute very well in the coming years. They are going to need to be rational. Increasing the dividend from $10 to $15 signals Fairfax is very bullish about its future - and that will be cheered my most investors. Well done Fairfax!

Edited January 4 by Viking

[villainx]

And the old thing where most companies Canadian and European companies are expected to pay dividends to have certain investors and index inclusion.  

 

Thankfully I'm not part of the highly compensated cohort that have to worry about potential taxes.  Oh wait, that's the wrong kind of thankful. 

 

 

[Munger_Disciple]

56 minutes ago, TwoCitiesCapital said:

 

Yes, 23.8% if you're making above 490k on an individual tax rate. Hence my comments about b*tching about a fraction of a % differential if you're making 500k+. 

 

Point is, everytime this company, and others, pays a dividend, this whole argument gets rehashed - and it's hardly worthwhile because history bears out that dividends make sense for MOST companies. 

 

Regardless of what I believe in Fairfax, I have to recognize the market is regularly wrong IF the primary source of returns has been the "inefficient" dividend. This HAS been true for MOST of the return in MOST of stocks across stocks market history.

 

Do I think Fairfax is the exception to that rule? Sure. But doesn't everyone believe that about every company they own? And that surely can't all be right! So I'm perfectly fine taking a dividend to hedge the case that I'm wrong. 

 

Prem made excellent capital allocations with the buy backs, the TRS, and the interest rate cycle. Decisions 10-100x more impactful than this one. I'm not gonna bitch about the potential taxes a handful of highly compensated people may pay because they upped the dividend by 0.5%...

 

And let's keep in mind, Prem is the largest of those people

 

 

 

We are not talking about some random company here, but FFH. I agree that some companies should pay dividends (for example Tobacco) instead of blowing it on some stupid acquisition. I would not trust a tobacco company with even buybacks because there is a significant probability of terminal value being 0. With respect to FFH, the tax situation for US residents is actually worse because the dividend taxes are withheld (at 25% rate I think) by the Canadian government before paying the rest to US residents regardless of their US tax bracket. And you can't even offset the pre-tax dividend against your investment expenses (for example margin interest). We can just agree to disagree with respect to the wisdom of dividend at FFH.

[TwoCitiesCapital]

8 minutes ago, Munger_Disciple said:

 

We are not talking about some random company here, but FFH. I agree that some companies should pay dividends (for example Tobacco) instead of blowing it on some stupid acquisition. I would not trust a tobacco company with even buybacks because there is a significant probability of terminal value being 0. With respect to FFH, the tax situation for US residents is actually worse because the dividend taxes are withheld (at 25% rate I think) by the Canadian government before paying the rest to US residents regardless of their US tax bracket. And you can't even offset the pre-tax dividend against your investment expenses (for example margin interest). We can just agree to disagree with respect to the wisdom of dividend at FFH.

 

No - tax treaty with Canada dictates otherwise. I pay 0 withholding as a US tax payer. 

 

And even if I did, I get credit for the taxes that are withheld when filing my US taxes. 

Edited January 4 by TwoCitiesCapital

[Munger_Disciple]

7 minutes ago, TwoCitiesCapital said:

 

No - tax treaty with Canada dictates otherwise. I pay 0 withholding as a US tax payer. 

 

 

I think that applies only to tax deferred accounts? I am pretty sure for taxable US accounts, there is a Canadian withholding tax. 

 

 

Edited January 4 by Munger_Disciple

[Gregmal]

Seems like a dumb thing to whine about, especially in light of the changing optics. It’s immaterial in terms of the overall earnings. It’s $15 outta $150 or whatever. Coulda

probably gonna to $35 without even noticing the cash was missing. But more importantly, folks want a better market reception? Eh screening as something doing double digit dividend increases definitely helps with that. Maybe next year they go to $25. The year after $35. That’ll start getting some attention. 
 

Sometimes, you’d don’t need to always be a “this is 100% the correct textbook value investor guy way to do things” type. If they pay a few bucks extra in taxes but the stock gets a better multiple then what is the problem?

[valueventures]

56 minutes ago, Munger_Disciple said:

 

We are not talking about some random company here, but FFH. I agree that some companies should pay dividends (for example Tobacco) instead of blowing it on some stupid acquisition. I would not trust a tobacco company with even buybacks because there is a significant probability of terminal value being 0. With respect to FFH, the tax situation for US residents is actually worse because the dividend taxes are withheld (at 25% rate I think) by the Canadian government before paying the rest to US residents regardless of their US tax bracket. And you can't even offset the pre-tax dividend against your investment expenses (for example margin interest). We can just agree to disagree with respect to the wisdom of dividend at FFH.

How does this Canadian withholding for US investors in taxable accounts work if you buy FRFHF (OTC) vs. FFH.TO (TSE) or FFXDF (OTC) vs. FIH-U.TO (TSE)? 

[Xerxes]

@Viking

 

Not to nitpick on your post, but when we say TSR, don’t we mean (dividend and capital gain) and not (dividend and buyback) ?
 

I think the latter is more from a company point of view. Typically called “total return” as oppose to “total shareholder return”. 

 

Ex: If a company reduces its share count by half over a decade, pays no dividend and the stock price is flat for the same 10 years (for whatever reason), the TSR is zero, while total return from the company is the aggregate dollar amount of buyback ? No ?
 

 

 

[TwoCitiesCapital]

1 hour ago, Viking said:

I love the 50% increase in the dividend to $15 (it had been at US$10 forever). Fairfax has paid a dividend for many years - and it is not going to stop (now that would be an idiotic thing to do). The fact Fairfax modestly increased the dividend should also not come a surprise to anyone. As was mentioned upthread, the payout ratio remains very low at 9% ($15 / $170 earnings in 2023). Yes, the increase of 50% looks dramatic - but let’s be honest, the amount is small potatoes in the big scheme of things ($5 for a company that is likely earning $170).

 

Small potatoes AND it's been the same $10 for the last 14+ years. Has been that since I first purchased the company in 2010. 

 

On an "inflation adjusted basis", the dividend has actually shrunk. On a payout ratio basis, it has shrunk. On a % yield basis, it has shrunk. So the 50% growth is entirely optics of we consider things YoY in real, and relative, terms. 

 

But instead of focusing on big things that actually matter, we're gonna nitpick the management over potential taxes a minority of shareholders pay on the incremental 0.5%?!?!?? 

 

I mean, c'mon. Next let's complain that we found out they're not using single ply TP in the bathroom because they shouldn't be using MY money for fancy toilet paper

Edited January 4 by TwoCitiesCapital

[nwoodman]

3 minutes ago, TwoCitiesCapital said:

 

On an "inflation adjusted basis", the dividend has actually shrunk. On a payout ratio basis, it has shrunk. On a % yield basis, it has shrunk. So the 50% growth is entirely optics of we consider things YoY in real, and relative, terms. 

 

Good way to look at it.  I would normally be in the bitching camp but am ambivalent as it it is great to see them having the confidence in their current financial position.

[Xerxes]

I ll add this about the flat dividend :

 

in some ways not being a typical dividend grower (aristocrat) has probably been hugely beneficial letting the team focus on real tangible opportunities (waiting for the phone to ring) as oppose to doing annual gymnastic to please the “aristocracy” and keeping them happy with the annual predictable growth.

 

It is a family office, they think like it and act like it. I like the approach. And happy to be riding along.