I have heard it repeated over and over again that dividends don’t matter to Warren Buffett, and therefore, should not play any meaningful role in how other investors arrange their personal affairs. This type of conclusion is based on the superficial fact that Warren Buffett prevents Berkshire Hathaway (BRK.B) from paying a regular dividend to its shareholders.
That conclusion is a bit off because it ignores Warren Buffett’s own history, his current personal circumstances, and the current incentives that he has offered for executives of Berkshire’s subsidiaries.
To understand Buffett’s own history, check out pages 338 and 339 from Alice Schroeder’s “Snowball” biography of Buffett which contains the following quote:
“As 1974 began, stocks for which he had recently paid $50 million lost a quarter of their value. Berkshire, too, slid down to $64 per share. Some of the former partners began to fear it had been a mistake to … Read the rest of this article!
As cable subscriber counts have dwindled in recent years, many analysts have been focused on the effect upon ESPN and its parent entity The Walt Disney Company (DIS). The reason for this is because the monthly channel cost for ESPN dwarfs everything else in the cable field. ESPN charges its cable distributors $7.21 per month for each subscriber, whereas Fox Sports 1 only charges $1.10. Fox Sports 1 can lose a bit over six subscribers in order for the shareholders of 21st Century Fox to sustain the same absolute dollar loss that Disney shareholders experience when just one ESPN subscriber is lost.
With 85 million subscribers, ESPN currently brings in $7.3 billion from subscriber fees. It also brings in another $3 billion from advertising.
On the expense side, ESPN pays $2 billion this year for Monday Night Football, $1.5 billion to show NBA basketball games, $700 million for baseball, and … Read the rest of this article!
I have a special fondness for York Water (YORW) stock because it has been paying out dividends uninterrupted since 1916. If you can keep sending cash to your owners during General Sherman’s March to the Sea, the Battle of Somme, the Battle of Guadalcanal, and all through to the post-war tech revolution, you deserve commendation for exceeding expectations that are nearly unmatched in the field of business.
But just because I love a corporation’s history does not mean that I can ignore the role price plays in determining whether or not a stock is a good investment at a particular point in time.
When you look at York Water, you should see a business that grows earnings 4-6% over the long haul and raises the dividend by 3-5% each year. It’s basically a glorified inflation hedge that gives you a slight bit of value created in excess of the inflation … Read the rest of this article!
In 2015, Anheuser-Busch stock hit a high of $130. This year, Anheuser-Busch hit a high of $136. The valuation of the stock was between 25x and 27x earnings, which made no sense to me given that the core brands were either stagnating or in decline (for example, Bud Light in 2016 ships out 10% less than it did in 2008). Even with 3G management taking aggressive action to raise the profit margin from 8% to 18%, the lack of organic sales growth meant that Anheuser-Busch didn’t deserve the type of premium you might pay for Visa, Alphabet, or Nike.
If you bought Anheuser-Busch at those valuation, you were probably setting yourself up for mid single digit returns. Nothing wrong with that–as long as you’re above 3.5% or so the decision to delay gratification still ends up making you richer–but I like to aim the bow a little higher and aim … Read the rest of this article!
In theory, buybacks can create more aggregate wealth than dividend payments because ordinary dividends get taxed at income tax rates while stock repurchases evade the reach of Uncle Sam. And the effectiveness of a stock buyback program is contingent upon the corporate management team getting the valuation. If you buy back stock when it’s cheap, you create value. If the stock is expensive and you repurchase stock, then you destroy value. That is why I have a special respect for Warren Buffett’s commitment to only repurchase Berkshire shares when it trades 1.2x book value or less–it is an implementation of the valuation requirement that is a necessary prerequisite for stock buybacks to create wealth.
Generally, the corporations that are most naturally suited to run successful buyback programs are those with large cash hoards, cheap access to borrowing, and/or stable cash flows even at the low points of the business cycle. … Read the rest of this article!