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Berkshire Hathaway Inc. Message Board

  • jad1148 jad1148 Jun 2, 2013 7:39 AM Flag

    OT - IBM's Dividend

    The annualized dividend per share is currently 3.80 (4 quarterly payments of 0.95). A quick, and admittedly superficial, review of the current Value Line report suggests that the future organic annual growth rate (growth from within, driven by absolute sales) might be about 3.3%. But by keeping the payout ratio low (to about 25%) IBM has the spare cash to buy back about 2.2% of its' shares per year. That boosts PER SHARE growth to about 5.6% per year, (1+3.3%) / (1-2.2%) = (1+5.6%). So, if your goal is to make a 7.5% return on your equity investments, then you might find IBM attractive, since it currently does trade near your IV: 3.80 / ( 7.5% - 5.6%) = 200. But if Mr. Market were to instantaneously change his mind and increase the discount rate by 1.0% (pushing it up to 8.5%) then you'd likely suffer a capital loss of about 34%, as IV falls from 200 to 131.

    My preference would be to terminate the buyback and raise the payout ratio (to 60% - 70%) putting the annualized dividend per share at 10.00. That would increase IV to 238, 10.00 / (7.5% - 3.3%) and reduce the potential capital loss to 19% (as IV decreases from 238 to 192) if the discount rate were to suddenly increase by 1%.

    Getting more of my initial investment back sooner, with a lower risk of capital loss, appeals to me.

    Needless to say, thanks to the BODs' current dividend policy, I won't be buying IBM.

    As always, just my opinion.

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    • mornin jad, just wondering, do you pay state taxes ? How much would munger NET, AFTER TAX, on a dollar div from brk ? Do you think munger would rather have 65 cents CASH, NET, after tax on the dollar div or a dollar of brkb common ? bro, seriously, it aint that complex.

    • "So, if your goal is to make a 7.5% return on your equity investments, then you might find IBM attractive, since it currently does trade near your IV: 3.80 / ( 7.5% - 5.6%) = 200."

      So, BRK has a tax basis in IBM at about $170/share. What do you think their return will be over the next several years?

      • 1 Reply to mvmitchell99
      • The forward dividend was about 3.00 per share per year when WEB bought at 170, so that puts his forward dividend yield at 1.76%. Adding that to the buyback supercharged 5.6% per year growth rate, suggests a total return of about 7.4% per year.

        Optimistically (using a backwards extension of the NCF list that I gave you in one of my previous posts) his return might be 9.1% over the next several years.

        { -170.00, 3.00, 3.40, 3.80, 4.00, 4.24, 4.48, 4.72*(1+1/1.7%)) }

        Just a reminder, forecasting future returns is more of an art (or a joke, if you're a cynic like me) than a science.

 
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