I guess exchanging three individual stocks (which may be overvalued) for a portfolio of stocks (that is very likely overvalued) isn't a terrible idea, but I'm not a buyer at the current valuation, a price to dividend ratio of about 34.6. I'll wait for a pullback before adding.
According to Vanguard, for the year ended 6/30/2016, VPU returned 31.68%. The bulk of the return, 26.2%, was due to an expansion in the price to dividend ratio, from 27.45 to 34.65. Just too many overly enthusiastic buyers bidding the price up, in my opinion. I won't sell what I have, but I expect my annual total return to average about zero (no better than cash) over the next three years.
Just my opinion.
Gross is doing some Macro stuff. I'm OK with growth of 8% per year, on average, for BRK.
Here's another way to look at BRK: pretend it's a 30-Year Zero Coupon Bond.
If BRK grows BV per share by 8% per year, on average, and is worth 1.2X book at maturity, what would it be worth then? 12.08X current book value per share? And if you discounted that by 7.62% (the current YTM on the 30-Yr Zero plus an equity risk premium of 5.5%) what would it be worth today? 1.33X current book value per share?
Because buying back shares just doesn't move the needle that much.
As of 3/31/2016 I estimate that BRK had (in billions):
2.465 equivalent "B" shares outstanding,
$258 in Book Value,
$33 in excess cash that could be distributed or used to repurchase shares,
and had generated,
$17 of trailing four quarter free cash flow to equity, which in the future, could be paid out as a dividend rather than being retained to book.
Just for the sake of argument, let's assume that 100% of future FCFE is paid out as a dividend, and value the dividend at 20X, that puts its IV at $340 billion.
Case #1 - Distribute the cash immediately.
IV per share = ($33+$340)/2.465 = $151
Case #2 - Us the cash to repurchase shares at 1.2X book.
IV per share =($0+$340)/(2.465*(1-$33/(1.2*$258))) = $154
So what is the better use of excess cash?
Spend more than 12% of book value on share repurchases and increase IV PER SHARE by 2%.
--- Or ---
Spend that $33 billion buying additional dividend paying stocks that immediately increase, and eventually grow, FCFE.
hjc, Manlobbi, who sometimes competes with Jim, valuation-wise, on the other board, has written a book, "Manlobbi's Descent", that is due for release on Amazon today. If nothing else, read the free "Look inside" preview. I found his writing style to be extremely weird, to the point where I'll probably pass on it. If you're interested in his methodology, "IV10/Price", find an old post on the other board that he authored, click on his name, and then click on the Info tab.
hjc, For a chart and table of interest rates going all the way back to 1Jan1871 search for:
multpl 10-year treasury rate
Note that the interest rate in 1938, the year John Burr Williams' book was published, wasn't much higher than it is today. Williams devoted Chapter XXI to a discussion and valuation of GM. He valued it, as of June 1937, using a discount rate of 4.75% and noted that his discount rate was higher than the 3% yield on government bonds, so he used an implied equity risk premium.
For book value per share, I use a trailing, three year rolling, compound annualized growth rate.
A 5% annual growth rate is too pessimistic, even for me.
Since 6/30/2006, only 1 of the three year periods out of the 40 periods total has been at or below 5%.
VL's 8% is acceptable, 29 of the 40 periods have been that high or higher.
Morning, hjc. I am looking at BRK-B as a possible short term trade, but I can't get excited enough about it to do it. I figure if I buy at a 10% premium (132%) to the buy back threshold, and sell three years later at the buy back threshold (120%), and book value per share grows, on average, by 8% per year (VL's estimate, not mine) that should be good for an IRR of about 4.6%. That does beat the 0.76% YTM on a 3-Year Zero (2019Jul31) but I was hoping to pick up a 5% equity risk premium on top of that. BRK-B would need to grow book value per share, on average, by about 9.18% per year or more to achieve that.
Aww, what's the matter babies? The truth hurt?
It's not my fault that your fellow berkies are jumping ship to join the Utilities & Telecom party.
You know, I never expected to average more than about 7% per year on either, but here I sit on high double digit returns, thanks to enthusiastic newbies.
Let's analyze BARRON'S 52 week (1Jul2016) data for the DJU index. The starting yield was 3.76%, and year over 52 week year, the dividends grew 4.17%. That's good for 8.09%. But wait, during that period the newbies bid the price to dividend ratio up 22.47%, from 26.61 to 32.59, pushing the total return out to 31.51%. Here's hoping I get to keep that.
Yesterday I told my wife, if this gets any sillier, I'll be sorely tempted to sell everything and go to cash.
I understand why you hate AAPL, like IBM it distracts and draws money away from BRK-B. I just don't see it as being a good candidate to short. Valuation-wise, AAPL trades at about 10 times TTM FCFE, paid out about 23% of that as a dividend, and used 71% to buy back stock. Is it any wonder that T&T are buying? Can you blame your fellow investors if they prefer to buy what BRK is currently buying instead of buying BRK?
I don't know how VL breaks it out. If you look at the 13F, various purchases are owned by both WEB, coded as a #4, and NIC, coded as a #11.
I don't understand your reference to me. I've never held gold and have only traded BRK-B intermittently (three times) between 9/28/1998 (first purchase) and 5/7/2012 (last sale). I've actually held BRK-B a total of 2,706 days out of the 4,970 days between those two dates and made an XIRR of 8.9%, which beats, by the way, a single "buy & hold" of 5.5%, over that period. It has been fun and a great learning experience.
Hi hjc. I bailed on my make believe paper trade last Friday because I wanted to lock in the "profit" and I thought that there were too many positives going forward. The April VL report was way too upbeat (the next report is due Friday, July 1) and with T&T buying, I figured the coat tailing wannabe's might mute the downside as well. Good luck with your trade.
hjc, my interest in options doesn't go beyond trying to understand the mechanics of a trade. I've been following your short (AAPL160916P00095000?) and have a question. Why did you pick a strike of 95 instead of 100? I'm still early in the learning process, but it seems to me that purchasing a Put with a strike as close as possible to actual stock price at the time of purchase would maximize the profit (force the biggest loss on the seller) without overpaying?