Altria Owns 27.0% Of SABMiller

When someone considers buying a stock, there are two types of thoughts that could enter his mind: market decisions and investment decisions. A market decision is what you’d expect; someone buys a stock and expects the price to go up, usually within a few months, or a year or two maximum.

An investment decision is much more binding in a self-imposed way—you are saying, “I really like the business economics here, and I believe this company is going to be generating much higher profits five, ten, even fifteen to twenty years from now. Getting past the obvious niceties that nothing is ever certain, you reach the conclusion that a company worthy of such an investment has a high probability of achieving the returns you predict.

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Citigroup Stock Pre-2008: When Investors Can Never Truly Recover

Most of the time, when we discuss stocks that have been irreparably harmed, we are talking about companies that have gone bankrupt, or have seen prices deteriorate so much that investors will never again so the “good old days” (usually this is the result of some kind of technological shift or high fixed costs that can’t realistically be lowered).

Today, I want to talk about a third kind of harm: share dilution.

Citigroup is one of the best companies that comes to mind I can use to illustrate the principle.

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Berkshire Hathaway: Breaking The Traditional Rules Of Income Investing

Lately, I’ve been coming around to the notion that buying Berkshire Hathaway is on the short list of “very intelligent” moves you can make today if your time horizon is 15+ years out and you are looking for something that will eventually pay dividends, but are investing in a taxable account and don’t mind seeing a pile of money quietly build up as Buffett does his thing.

There’s a couple things that brought me to this point: Upon reflection on Buffett’s letter to shareholders that came out in the spring, we have a very rough gauge of what Buffett considers to be the fair value of Berkshire Hathaway stock (you should note that Buffett doesn’t spoon-feed information to his audience, so he makes you do just a little bit of independent thinking before you reach the conclusion that he desires).

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Campbell Soup Vs. Disney Dividends (When Higher Yield Leads To Inferior Investing)

Peter Lynch once remarked that casual investors know just enough to be dangerous when they start combining two principles—the belief that having heard of a company that’s been around for a while is proof that it is of blue-chip quality with the belief that a low price-to-earnings ratio is proof that a stock is cheap.

By way of example, Lynch pointed to Ford Motor Stock (F) at the high point of a business cycle right before the economy turns for the worse because: (1) stock prices tend to be high when the economy is doing well, making investors feel more comfortable about making new stock investments despite all the historical studies pointing out that this is a bad impulse, (2) Ford “feels like a blue-chip” because investors have heard of it, and (3) the low P/E ratio lures people in, who are unaware that automotive profits fall 50-75% as the economy moves from the top of the expansion to the bottom contraction part of the business cycle.

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Microsoft’s 2004 Special Dividend And Growth Investing

I was reading a forum post at Money Crashers where Hank Coleman wrote an article four years ago concerning the effectiveness of one-time dividends, with Microsoft’s $32 billion special dividend in 2004 being the most famous example in the past generation.

Hank said:

The problem with Microsoft is that it is a cash cow like Frontier, but Microsoft cannot come up with much else to do with their free cash flow. They could be expanding, buying companies, coming up with new product lines, etc. But, no…they are just handing their profits back to their stock holders, and I think that is why stock holders have seen the company’s share price go nowhere for years now. In fact, shares of Microsoft are the same price and even a dollar less now than when it began issuing dividends in 2004.

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