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Berkshire Hathaway Inc. Message Board

  • npv72000 npv72000 Mar 2, 2003 12:22 PM Flag

    Berkshire dividend

    Just one final thought about this issue of the distribution of retained earnings. I would suggest (and I'm sure opinions will vary), that should berkshire intiate a dividend, that the distribution of the market price of berkshire, will shift to the left. IMO investor expectations regarding the E(R) on the retained earnings will be lowered and reflected in the range of price on Berkshire.

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    • Hi npv72000,

      My thoughts exactly!

      The simply discounted dividend model presented in message # 147374 {see that post for details} demonstrates the effect of delaying the dividend as long as book value per share is still growing at satisfactory rates.

      V/s = D/B * B/s * [ ( 1 + g.x ) / ( 1 + r ) ] ^ n * ( 1 + g.s ) / ( r - g.s )

      Given the following assumptions:
      V/s = value per share, to be determined.
      D/B = Dividends payable as a fraction of book value per share = 0.054.
      B/s = Book value per share = 40,814 (9/30/2002).
      Note that: D/B * B/s = D/s = Dividends per share.
      g.x = extraordinary growth rate in book value per share for the next "n" years = 0.0988 {real} or 0.1246 {nominal}.
      g.s = sustainable growth rate in book value per share from "n+1" to perpetuity = 0.0000 {real} or 0.0234 {nominal}.
      r = discount rate = 0.0350 {real} or 0.0592 {nominal}.
      n = number of years of extraordinary growth before the dividend and sustainable growth take over.

      Then:
      n, years .................. |...... 0 |....... 3 |....... 5 |........ 7 |..... 10 |
      =========================================
      V/s, thousands $ .... |..... 63 |..... 75 |..... 85 |..... 96 |.... 115 |

      The sooner Berkshire pays a dividend the less it is currently worth, assuming of course, that the compound annual growth rate in book value per share (measured over a five year period) is still acceptable.

      So, be careful what you wish for ... you may just get it.

      I personally would not press Mr. Buffett for a dividend at this point in time.

      And, I might add, that remark comes from one of the "losers" {see message # 157163}.

      Regards,
      jad

      • 1 Reply to jad1148
      • Hi jad,

        Sorry that I had missed your posts, I don't visit here much towards the end of the year. I like that you think in real terms because ultimately it is our purchasing power that we are looking to increase. I also like that you look at what is implied by the prevailing market prices. For myself I tend to look at the implied E(R). Lastly I like that you use multiple frameworks in your analysis, it can be done but it's harder to fool yourself that way. Quite a few I's in this post too. ;-)

        "So, be careful what you wish for ... you may just get it."

        The thing about it though that while I would expect a shifting to the left of the distribution, I'm not exactly sure how it would manifest it could be that the central tendency shifts to the left or that the skewness of the distribution shifts. But I would also expect that the standard deviation to narrow, so depending on the prevailing market price, I'm not sure what the short run effect would be.

        You take care!!!

 
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