Fairfax 2024

[value_hunter]

If you hold FFH.to in Canadian account, will the broker/bank charge 2.5% exchange fee for the dividend?

[Parsad]

3 hours 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.

 

I think the nominal loss in taxes from a dividend for higher income earners is offset by the fact that the valuation of the company is higher and buybacks just won't be as accretive as they were 1-2-3 years ago.

 

As ineffectual as dividends may be, buying back shares when they aren't accretive to earnings and intrinsic value is also foolhardy.  And both should only be done if you cannot allocate that capital at reasonable rates of return.

 

With 95% of my FFH shares in non-taxable accounts or a corporate account, I'm fine with a modest dividend increase.  It won't kill me to pay my fair shares of taxes.  Cheers!

 

 

[Jaygo]

36 minutes ago, Parsad said:

 

I think the nominal loss in taxes from a dividend for higher income earners is offset by the fact that the valuation of the company is higher and buybacks just won't be as accretive as they were 1-2-3 years ago.

 

As ineffectual as dividends may be, buying back shares when they aren't accretive to earnings and intrinsic value is also foolhardy.  And both should only be done if you cannot allocate that capital at reasonable rates of return.

 

With 95% of my FFH shares in non-taxable accounts or a corporate account, I'm fine with a modest dividend increase.  It won't kill me to pay my fair shares of taxes.  Cheers!

 

 

When you say corporate account, are you referring to a Canadian corporate hold co?  
 

if so are the taxes not basically the same as personal these days? Not to get off topic but I’m eager to implement some housekeeping with my books and have been looking at investing through my operating business and taking lower personal salary. 

[glider3834]

8 hours ago, Parsad said:

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!

+1

 

my thoughts are

- it rewards Prem, FFH mgmt & staff who own FFH shares after excellent operating results in a way that is shareholder aligned - thats positive

- it attracts investors to Fairfax that are focused on dividend yield and/or companies that are increasing dividends - that potentially impacts multiple & potentially could increase the value of the TRS position

- it suggests confidence by Fairfax mgmt in earnings forecasts and cash generation going forward - again that can impact investor psychology and impact Fairfax multiple & the value of TRS position  

- 8.5% of the dividend should effectively flow back to Fairfax due to TRS on 1.96M shares

 

the benefits above outweigh any additional tax considerations IMHO

 

 

[Munger_Disciple]

3 hours ago, valueventures said:

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)? 

 

Makes no difference to a US tax payer (with respect to Canadian withholding tax on dividends) where he bought the stock. 

[Munger_Disciple]

53 minutes ago, Parsad said:

As ineffectual as dividends may be, buying back shares when they aren't accretive to earnings and intrinsic value is also foolhardy.  And both should only be done if you cannot allocate that capital at reasonable rates of return.

 

 

This makes no sense. The buyback is accretive to the intrinsic value & earnings as long as the share price at which you are buying back shares is below their intrinsic value. Your post only makes sense if you think FFH intrinsic value is below its book value where it is roughly trading currently. 

Edited January 4 by Munger_Disciple

[Parsad]

8 minutes ago, Jaygo said:

When you say corporate account, are you referring to a Canadian corporate hold co?  
 

if so are the taxes not basically the same as personal these days? Not to get off topic but I’m eager to implement some housekeeping with my books and have been looking at investing through my operating business and taking lower personal salary. 

 

Yup.  While dividends aren't particularly tax-efficient in a holding company, getting income in various streams from my investments (mostly capital gains, some interest income and a modest amount of dividend income) and operating businesses (earned income taxed at a favorable CCPC rate)...the tax burden isn't onerous and if Fairfax pays a modest amount in dividends is perfectly fine.  Cheers!

[Parsad]

1 minute ago, Munger_Disciple said:

 

This makes zero sense. The buyback is accretive to the intrinsic value & earnings as long as the share price at which you are buying back shares is below their intrinsic value. Your post only makes sense if you think FFH intrinsic value is below its book value where it is roughly trading currently. 

 

Of course it makes sense. 

 

Fairfax buying their stock at or below book value means that they are effectively getting a 15% ROE on the buyback.  If they are paying at book or higher, their return is lower than their long-term goal of 15% ROE.  Being below intrinsic value, but above book value, is not accretive to present earnings, cash or book value...effectively, you are getting a return below what their long-term goal is.

 

Where is stock price versus book today?  Thus, investors are better off if FFH holds on to the cash and waits for opportunity, or returns some of that cash in buybacks or dividends if they don't feel they can deploy all of it.

 

Cheers!

[petec]

10 hours 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. Dividends are great for most companies, and I love Prem's salary and (therefore) alignment via dividends.

[MMM20]

10 hours ago, Munger_Disciple said:

there is a significant probability of terminal value being 0

 

Would love to debate this point over at the BAT / PM threads

[MMM20]

9 hours ago, Parsad said:

If they are paying at book or higher, their return is lower than their long-term goal of 15% ROE.  [Buying] below intrinsic value, but above book value, is not accretive to present earnings, cash or book value...effectively, you are getting a return below what their long-term goal is.

 

I'm reluctant to wade in here b/c it probably won't be productive, but I can't help but point out that accounting book value still has almost nothing to do with intrinsic value (and therefore the wisdom or folly of various capital allocation decisions) for Fairfax and almost every other company nowadays. The fact that even smart investors still think this way is probably part of why Fairfax remains so cheap. Fairfax's recent transformation into a cash machine isn't really reflected in the historical accounts and that's *still* the whole opportunity in a nutshell. "Thank God we don't design bridges and airplanes the way we do accounting." -Munger

 

Edited January 4 by MMM20

[Junior R]

8 hours ago, value_hunter said:

If you hold FFH.to in Canadian account, will the broker/bank charge 2.5% exchange fee for the dividend?

you might...best to ask them to journal the stock over to usd side so you avoid the 2.5 fee

[Thrifty3000]

Regarding the dividend, if memory serves, I believe one of FFH’s largest and most loyal shareholders has routinely been popping up on quarterly calls and politely asking Prem to consider a dividend increase. I like that Prem is setting an example here of how to be fair and friendly to long term investors.

 

I also think there is psychological managerial benefit to being on the hook for paying your investors a dividend. It helps make managements more financially responsible. My hunch is managements that don’t pay a dividend are more apt to spend money on nap pods, trophy office spaces and moonshot bets.

 

I assume the intangible benefits of investor goodwill and cultural discipline will ultimately offset the added tax burden.

[Munger_Disciple]

12 hours ago, Parsad said:

 

Of course it makes sense. 

 

Fairfax buying their stock at or below book value means that they are effectively getting a 15% ROE on the buyback.  If they are paying at book or higher, their return is lower than their long-term goal of 15% ROE.  Being below intrinsic value, but above book value, is not accretive to present earnings, cash or book value...effectively, you are getting a return below what their long-term goal is.

 

 

I am reluctant to extend this debate, so I will just say I disagree with your interpretation of intrinsic value of FFH. Anyhow FFH is trading at book, not far above it. Furthermore, the goal of any buyback is not to be accretive to book value but to intrinsic value which will happen if buyback price < IV.  

[SafetyinNumbers]

I prefer FFH keeps using the TRS vs buybacks for the enhanced financial flexibility and because it doesn’t shrink the market cap. The larger the market cap, the more likely we have a replay of the 95-98 period and get a more reasonable P/B multiple. Being added to the S&P/TSX 60 seems like a real possibility if FM and/or AQN get removed in the short term which could be a trigger. FFH’s weight is just going to go higher over time so entry into the 60 seems inevitable even if it takes a few years.

[treasurehunt]

14 hours ago, Parsad said:

Fairfax buying their stock at or below book value means that they are effectively getting a 15% ROE on the buyback.  If they are paying at book or higher, their return is lower than their long-term goal of 15% ROE.  Being below intrinsic value, but above book value, is not accretive to present earnings, cash or book value...effectively, you are getting a return below what their long-term goal is.

Why would Fairfax buying stock at book value imply getting 15% ROE on the buyback? This is only true if Fairfax's return on equity right now is 15%. According to Viking and others, current normalized earnings per share might be in the $170 range, implying a current ROE of close to 20%. On the other hand, ROE on incremental capital may be 15% at best, especially if Fairfax does not keep its capital base in check. So buying back close to book value is a better move financially than keeping the capital for deployment. There may be real-life constraints that prevent a buyback, of course.

 

Basically you are assuming that ROE on the current book is less than or equal to ROE on incremental capital, and this seems unlikely.

[Hamburg Investor]

Totally agree as I wrote, that in the end adding 5 dollars to the dividend is no big deal, when earnings are (way above) 150 dollar. It’s just a really small portion. And it‘s okay and there is a reason for doing it and taxes are in my view no big deal. 

 

Even though I don‘t like speculating where and why the stock price goes into which direction over short time frames (there are just too much variables we don‘t know in the future, which starts tomorrow), I agree, that growing dividends give pressure into the direction of a rising share price.
 

But like Buffet said (from memory), being a longterm shareholder of a good company buying back its stock, a low shareprice is beneficial. It helps buybacks being more efficient. Intrinsic value grows stronger, when Fairfax can buy back a. more shares at b. lower prices. Lower prices give higher returns. So at todays price, if Fairfax would cut the dividend to zero, Fairfax could buy back nearly 5% extra of outstanding shares with that dividend money over three years. Or nearly 10% over 6 years.
 

Without a dividend the stock price would potentially be lower for the here named reasons than with a rising dividend. So it would get easier to not only buy back more shares at cheaper prices with the cash from quitted dividends, but also with the cash, that will be invested into buybacks within the next years anyway. Even another TRS investment (my guess is not at the same level) gets more likely. Rising dividends push the share price, which make buybacks less attractive. So in a way dividends are not the friend of buybacks. 

 

It has been said here, that the return of the incremental capital is crucial and I agree. My best guess is that the roe of Fairfax will be at least 15% (so I agree with Prem) and maybe even 20% over the next decade. So the intrinsic value of Fairfax should be way above its current price. So at todays price the returns for the the incremental capital used for buybacks of Fairfax would be even some points above those numbers of 15% or 20%.  

 

On the other hand rising dividends and stock prices help Fairfax reputation (which e. g. helps to refinance debt) and the share price and 8.5% get back directly (very good point!).

And even longterm shareholders have to sell one time and should get a fair price (like I am hoping to get a fair price, when I am retiring). So my personal bottom line: It‘s okay to raise dividends, even if it might not be the most efficient use of capital. And after all the use of 5 dollar/share of incremental capital is just not all important for Fairfax future. 
 

 

[Parsad]

14 hours ago, MMM20 said:

 

I'm reluctant to wade in here b/c it probably won't be productive, but I can't help but point out that accounting book value still has almost nothing to do with intrinsic value (and therefore the wisdom or folly of various capital allocation decisions) for Fairfax and almost every other company nowadays. The fact that even smart investors still think this way is probably part of why Fairfax remains so cheap. Fairfax's recent transformation into a cash machine isn't really reflected in the historical accounts and that's *still* the whole opportunity in a nutshell. "Thank God we don't design bridges and airplanes the way we do accounting." -Munger

 

 

Are you suggesting that accounting earnings and cash flow also has nothing to do with earning power?  It's easy to negate the value of accounting when it comes to intrinsic value, but accounting remains the only way to accurately gauge intrinsic value. 

 

The full quote is:   "Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting."

 

Nothing wrong with accounting or book value, as long as you understand why it is so.  Cheers!

[Parsad]

5 hours ago, treasurehunt said:

Why would Fairfax buying stock at book value imply getting 15% ROE on the buyback? This is only true if Fairfax's return on equity right now is 15%. According to Viking and others, current normalized earnings per share might be in the $170 range, implying a current ROE of close to 20%. On the other hand, ROE on incremental capital may be 15% at best, especially if Fairfax does not keep its capital base in check. So buying back close to book value is a better move financially than keeping the capital for deployment. There may be real-life constraints that prevent a buyback, of course.

 

Basically you are assuming that ROE on the current book is less than or equal to ROE on incremental capital, and this seems unlikely.

 

Their long-term target is 15% ROE...or 15% return on book.  If you buy at book, you naturally would then expect a 15% return.  Higher than book would be less than 15%.

 

The $170 range is not normalized earnings.  It is earnings expected for the next 2-3 years.  May be more...may be less in terms of future earnings power.  I'm just using Prem's own target of 15% ROE. 

 

Cheers!

[OCLMTL]

Beyond the debate of the incremental benefits which the $115M per year would bring if it was focused on buybacks, dividends, investments, etc, I think the $115M could create billions in value by restoring confidence in management and the new, higher earnings power of the company. If that “social capital”, that reputation of the mgmt gets enhanced enough in 2024 because of a big bump in dividends, then the “ROE” of that $115M could be a 0.2-0.3x BV impact. THAT is money well spent … 

[Haryana]

The whole debate about dividend vs buyback may be dissolved if we ponder on this:

 

The primary business is to keep the company strong and expanding for the long term.

Returing capital at times of temporary undervaluation is a far secondary consideration.

We get myopic based on how the dividend will affect our own unique personal situation.

 

 

[Viking]

5 hours ago, OCLMTL said:

Beyond the debate of the incremental benefits which the $115M per year would bring if it was focused on buybacks, dividends, investments, etc, I think the $115M could create billions in value by restoring confidence in management and the new, higher earnings power of the company. If that “social capital”, that reputation of the mgmt gets enhanced enough in 2024 because of a big bump in dividends, then the “ROE” of that $115M could be a 0.2-0.3x BV impact. THAT is money well spent … 

+1    Fairfax needs to re-build investor confidence. That is extremely important. Increasing the dividend is a no-brainer way to do that (yes, just one of many things that need to happen). And a material - 50% - increase in the dividend is even better (as long as it is sustainable… which it is in this case). 
 

Three things drive a share price:

1.) earnings

2.) multiple

3.) share count

 

The spike higher in Fairfax’s shares the past three years has been driven by a spike in earnings and a rapid decrease in the share count. Multiple expansion HAS NOT HAPPENED. Yet. I think it will. But to get multiple expansion the management team will need to keep doing what they are doing - delivering solid results and communicating well. 
 

Multiple expansion is rocket fuel to a share price. 

[dealraker]

May the stock price drive us all to insanity!   Given there ain't much around to buy, we may very well miss the current stock price we incessantly complain about.  

[Crip1]

20 minutes ago, dealraker said:

May the stock price drive us all to insanity!   Given there ain't much around to buy, we may very well miss the current stock price we incessantly complain about.  

I was thinking the very same thing. Holders will look back on this as a frustrating time but, in a couple years, people will look back on this as being the good old days from a buying perspective.

 

-Crip

[nwoodman]

1 hour ago, dealraker said:

May the stock price drive us all to insanity!   Given there ain't much around to buy, we may very well miss the current stock price we incessantly complain about.  

+1 or perhaps that should be +1200 USD.