« It makes perfect sense ... »
Actually, that makes NO sense at all.
Just my opinion, but my guess is that IBM is currently trading at a price that would generate a theoretical nominal annualized total return, TNATR, of about 9.8%. Rhetorical question: Is it any wonder that Buffett is buying?
Assumptions: IBM will continue to spend as much on buy backs (reducing the share count) as they do to pay the dividend ($5.20 per share); has no real growth, 0.00%, that, is year over year over year, the same number of customers will buy the same amount of products & services; BUT IBM can raise their prices & realize profits, that grow at the same rate as inflation (~1.89%).
Just think, if the market priced IBM today, to generate a TNATR similar to AT&T's 7.6%, it would trade at ~$190 per share.
It looks like the author has done a good job of presenting both the pros and cons.
For me, the key "takeaways" were:
• "Free cash flow generation is no problem for IBM and won't be for the foreseeable future."
• "The company has raised its dividend for 20 consecutive years and shows no signs of stopping."
• "IBM's payout ratio is less than 35% on a trailing 12 month basis, leaving it with plenty of flexibility for growth."
« lets see how the year ends up »
LOL!, your holding period is 43 days?
What do you believe IBM will do over the next 30 years?
I'll guesstimate that it will pay out dividends that total at least two times his original purchase price and end the period trading at a residual price that is at least three times his original purchase price. That's not a great return by any measure, but it does beat the 4.26% YTM on the 30-Year Treasury that was available at the time of his initial purchase.
« What does Gates think about BRK's investment in IBM? »
See msg # 216710 on the other board for an excerpt and a link (requires a subscription) to the source.
As you read the excerpt note that he qualifies his remarks with the following phrases:
... "I competed with them ..."
Seriously, if you asked a Chevy Malibu dealer for his opinion of the Ford Fusion what would you expect to hear?
Regarding Gates? No and No.
Anytime you coattail Buffy you're taking your chances.
Some of his picks (the textile mil) work out and some (Dexter Shoes, my father used to wear them) don't.
Wow, hc, now you've given even me a reason to throw caution to the wind (ignore single stock risk) and contemplate buying IBM. $116 per share, (your "downside target of 8 xs 14.50") implies a theoretical nominal annual total return of more than 9%, and that's assuming that IBM will have no real (organic) growth and no inflationary (pricing power) growth in the future, that their only source of per share growth will come entirely from buying back their own shares. Of course, they'll need to spend as much on buy backs as they do on dividends, which, by the way, they did in the third quarter!.
TNATR = ( 1 + $5.20 / $116 ) / ( 1 - $5.20 / $ 116 ) * ( 1 + 0% ) * ( 1 + 0% ) - 1 = 9.3%
It'll be interesting to see if Buffy bought more in the third quarter. Correct me if I'm wrong, but isn't the 13F-HR due on Monday?
Faith and begorrah!
I thought Kevin's father was a fellow potato eater.
No doubt he get's his good looks from his Lebanese mother.
But, really, who cares?
It's all good man.
Thanks for the heads up, hc.
QUAL, the ETF he's recommending, is an interesting alternative to either VOO (Vanguard's S&P 500 ETF) or RSP (the equal weight version of the index that Jim, the other board's guru, favors). But it does have a basis toward Growth stocks and thus its price to trailing dividend ratio, about 65, is too rich for me, so I'll pass. I'm currently watching OUSA (which can be thought of as "Mr. Wonderful's" Value equivalent of QUAL), VIG, and VYM. Their P/D ratios are still too high for me.
Congratulations TF, for having the courage to execute on the strength of your own convictions.
I'll be cheering from the sidelines (too old, too risk adverse now, to be a playa). My guess is, that with any luck at all, your annualized total return over the next five years on that particular aliquot should be about 13%, better than what BRK is likely to do.
I enjoy digging through Jim's (the other board's "guru in residence") posts.
The consequences implied by the following sentence, from post # 219796, are worth thinking about, in my opinion.
« The average US firm in the average year trades at about 13.5 times earnings. »
IMO, the S&P 500 has outperformed BRK-A because it has paid and grown the dividend per share faster than BRK has grown book value per share.
The S&P 500 started the five year period at a P/D of 51.05, ended it at 45.17, and grew D/s by an average annual rate of 13.71%.
BRK-A started the five year period at a P/BV of 1.37, ended it at ~1.30, and grew BV/s by an average annual rate of 10.52%.
Growth Adjusted Internal Rate of Returns:
S&P 500, 13.7%:
Clearly paying and rapidly growing the dividend (no doubt a result of increasing the payout ratio in combination with buying back shares) beat sitting on too much cash (while waiting for elusive elephants).
Thanks for the heads up, but I'll pass. It's a highly leverage portfolio of exotic credit instruments with unknown credit ratings. I've stopped looking at stuff like this (high income yield today, capital losses likely tomorrow). I've recently looked at and passed on NCZ, O and MSB. The Fed has taken too long to unwind their ZIRP and I've now begun to burn my investable cash hoard. Game over.
Thank you for the suggestion. I will take a look at the posts over there.
I don't consider myself to be a high yield investor and become extremely wary of yields greater than about 5%.
Consider, for a moment, two investments, "A" & "B", both have a similar total returns of ~7%.
"A" currently pays you ~2% and grows the distribution by ~5% per year, (e.g., the S&P 500).
"B" currently pays you ~5% and grows the distribution by ~2% per year (e.g., "T").
I would pick "B" or "A" because its price should decline by less (by 1/6 vs 1/3) if folks suddenly decided they needed a total return of 8% instead of 7% to be happy.
Last November someone posted a message on the IBM that "C" currently paid 11%. My first thought was really? and so does it grow the distribution by -4% (that's a minus 4%) per year?
Annualized, the change in distributions has been -5.66% per year and the change in net asset value has been -6.82% per year. Let's just use -6%, 11% (income yield) minus 6% (capital losses) is a total return of 5% and that's worse than either "A" or "B".
That's not exactly the type of investment I want to pass on to wife someday.
Thanks, hc. I did scan the article, but this says it all: « Disclosure: I am/we are long NCZ ». IMO, it's just another cheerleader piece. I finally gave up on NCZ and have now taken it off my watch list.
To make it stretch, I need to raise the aggregate yield of my portfolio. I did buy more VPU last week (~5% of portfolio). My buy was at a P/D of ~27. If the dividend continues to grow by about ~5.4% per year that should provide a reasonable return.
And there is a very good reason why.
Since inception, 7/31/2003, the fund's net asset value has fallen 56.87%. That annualizes to an average loss of 6.69% per year.
The fund paid its first distribution twelve years ago, $0.11563 per share per month on 10/01/2003, and it now pays $0.0575 per share per month on 10/01/2015. That 50.27% drop annualizes to an average loss of 5.66% per year.
« As painful as a 25% drawdown would be even for me, its a lot less severe than the 50%+ drawdown that would be necessary if you have margins fall back to earth at the same time. »
The S&P 500's trailing four quarter earnings (as reported earnings per share, Howard Silverblatt's data) peaked at the end of the 3Qtr2014 and has been falling ever since.
Qtr Ended ...... EPS(T4Q)
09/30/2014 ... $105.96
12/31/2014 ... $102.31
03/31/2015 ..... $99.25
06/30/2015 ..... $94.91 Est'd
How low will they go?
IIRC, Stockman believes normalized earnings would be about $80 (which is a profit margin of ~7% on revenue of $1146). Multiple that by a P/E of 15 and that would drop the S&P 500 down to $1200.
« I'm not really that worried about a market PE of 19.5 ... »
Well, with your 40 year investment horizon I can understand why. For anyone with a shorter horizon buying at 19.5 and selling at 15.5 will probably be painful. Essentially you're giving the seller the first three years of YOUR (the buyer's) return for the privilege of being allowed to buy his overpriced stock.
The excerpt below is from an interview that appeared in BARRON'S (January 3, 2011, pp. 27-28) with Ben Inker, Head of Asset-Allocation Group, GMO.
How do you define value?
With regard to stocks, fair value is a valuation level at which you could get a decent return for the stock. That means that at fair value, you should be able to get an annual real return of 5½% or 6% from developed stock markets. In order to do that, stocks need to be trading at a multiple of normalized earnings which is consistent with that. You want to see a price/earnings ratio on normalized earnings of around 15 times, maybe 16 times, if you are lucky. With bonds, it is even simpler, because you know what the coupon is. The questions are, do you know what the coupon is, what is inflation going to be, and is the resultant real yield sufficient?
The entire article is worth reading, to find it, search using the following string:
« The Charms of Cash Ben Inker »
I can certainly understand wanting to dump BRK for any number of reasons.
But really, now?
At ~1.3 X book?
And to do what?
Buy (of all things) the S&P 500 at ~19.6 X earnings?