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Berkshire Hathaway Inc. Message Board

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  • jad1148 jad1148 Mar 2, 2003 1:49 PM Flag

    Berkshire dividend

    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

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    • 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!!!

      • 1 Reply to npv72000
      • npv72000,

        The second sentence should read:

        "So, those of you demanding a dividend, be careful what you wish for ... you may just get it."

        You, of all people, didn't deserve that. You obviously have given a lot of thought to the effect on value (and the market price which should track it) if dividends commence anytime soon.

        I learned to do calculations involving future projections in the "real" (inflation corrected) world by studying and "reverse engineering" Jeremy Grantham's calculations. It just makes so much sense to do it that way. Inflation is known in hindsight but cannot be predicted with any degree of accuracy going forward. If you make the assumption that the growth rates of earnings, dividends and book value of all good businesses [Footnote] are at the very least inflation protected you need only make assumptions with regard to their real growth rates going forward when making projections. Of course you must also define the discount rate (return) in real terms also (the average coupon on TIPS, Treasury Inflation Protected Securities, is a convenient means of doing just that). No mixing of real and nominal in the same equation!

        I also agree that the market price volatility (as measured by the standard deviation of the Price/Book ratio) should decrease once regular dividends have begun. Unfortunately, the mean (average) Price/Book ratio should also decrease because the real growth in Book/share will also decrease as a result of less retained earnings.


        [Footnote]
        Definition of a good business -- one that has a sustainable growth rate greater than or equal to the rate of inflation.

        I know, that's circular reasoning. Or is it recursive (defined in terms of itself)? Anyway, I'm sure you know what I mean.

        Regards,
        jad

 
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