I looked at UTG and I'm going to have to pass on it. It's just too risky for me. It's a leveraged (currently ~23%, but they're allowed to go up to 38%) closed-end fund. Leverage (additional stock bought with borrowed money) increases the returns when the market rises, but also increase the losses when the market nose dives. Compare the actual closing prices on 3/7/2008 and 3/6/2009. UTG suffered a capital loss of 63.2%, compared to VPU's loss of 38.6% for that 52-week period.
I doubt that "management exercises and holds its shares". Why would they want to own a POS? Many, many years ago I was given options (ten year, they vested over four), only because EVERYONE else did too. When the time came to cash out, I exercised using a "cash-less" sell. Their broker lent me the money, overnight, to buy and then sell the shares the very next day at the open. I got a check in the mail for the difference between the buy, sell, and strike prices, minus a fee. I only "owned" the stock for a fraction of one day, overnight.
« THIS indicates a BUYER !!!!!! »
Well, hc, I'm beginning to believe that. You'd have to be a true-blue koolaider to buy into the following argument, but for what it's worth, theoretically speaking, a price per share, "P", of $164 might get you a 9% annualized total return.
According to Yahoo, IBM's TTM diluted earnings per share was $12.34 as of 9/30/2014. They're paying a dividend of $4.40 per share per year, and CapX net of Depreciation is less than zero, which suggests that all of earnings, net of the dividend ($7.94 per share) is available to fund buy backs. I'm going to assume that their inherent (organic) nominal growth rate is about 1% (see my previous post).
ATR = (1+4.40/P)*((1+1%)/(1-7.94/P)-1 = 9.0%
Does that make sense?
Don't hold your breath while you wait.
BRK owns about 7.1%.
If IBM buys back 3% of their shares each year then it will take about 64 years for BRK's ownership stake to rise to 50%, ln(7.1%/50%)/ln(1-3%).
valueinvestor1234, I'm afraid the VL analyst doesn't share your optimistic projection of 12% growth for the next five years. He's "penciling in" 4.0% per year for the operating margin and 3.4% per year for the net profit margin. As far as the discount rate is concerned, you may use whatever ridiculously low interest rate you want for the first five years, but be sure to use something far more credible (CalPERS wants 7.5%, WEB's expected long-term rate of return on his pension plan assets is 6.7%, 2013AR, p.61) for the 295 years that follow it.
hc, if you get a chance, read Jim's post # 213783, "OT: IBM trading", on the other board. Worth thinking about anyways.. Reminds me of the old "Oil discovered in hell!" joke.
axp, what else could they do? Look at the current value line report. The VL analyst's expectation for the next five years is 1% per year revenue (organic) growth, from an actual 99,751 M$ for 2013 to a projected 105,000 M$ for 2018. A 2.7% dividend yield with 1% annual growth just isn't going to do it. But, if they buyback 3% of their shares per year they can "financially engineer" a 4% per year, PER SHARE, growth rate, bringing the total return up to about 6.8%, which should mollify the market. In my opinion, raising the dividend yield (by increasing the payout ratio) would be better for the common shareholders, but increasing the price per share is absolutely required by the folks who really count, those who would like to see their exercisable options deeper in the money.
As always, just my opinion.
hc, I'm not aware of the studies that interest you, but I really haven't been paying attention either. I lost interest in "coattailing" BRK after I copycatted PIR (lost money) & KFT (acceptable, but unimpressive XIRR of ~ 7%).
This board has its fair share of "4-watt night lights" too, who enjoy rubbing other folks' noses in trades that have gone sour (like that has NEVER happen to WEB). I won't do to TF what I don't appreciate other folks have done to me. IMO, this board has become almost worthless thanks to that kind of pettiness.
I thought the following remark was misleading:
« By comparison, the average 10-year return over that entire period, regardless of P/E ratio, is 36.3 percent. »
Look at the "Return vs P/E ratio" chart below it. The min & max are about -10% and 13%, and the mid point of the scatter plot looks like it is somewhere around +3%. Maybe the author meant cumulative 10 year total return of 36.3%, that would annualize to about 3%.
By the way, I'm really unhappy with WEB's "zone of reasonableness" remark. Apparently I'm not alone. Jim on the other board doesn't agree with it either, and has courageously fought with the "4 watt night lights" over there, who want to argue that WEB is right, that this time it's different.
I don't know if the market (the S&P 500) will go down or not, but I believe it should.
The price you pay today, determines the return you'll make in the future.
What do you want to make?
CalPERS wants a nominal (which includes inflation) 7.5%, which is roughly 5.0% REAL (net of inflation, assuming inflation is about 2.4%).
Since 12/31/2000, shareholders have received about three cents per share in dividends for every dollar of sales (AKA revenue) per share (mean ± stdev, 2.55% ± 0.27%; median, 2.53%; and currently, as of 6/30/2014, 3.27%).
Historically, sales per share has grown by about 1.8% per year (REAL, net of inflation). Lately, the annual growth rate has been a lot less.
IV/Rev = Div/Rev / ( r - g ) = 3% / ( 5%- 1.8%) = 94%
Rev/s as of 6/30/2014 was $1142.43
That puts IV/s at ~$1,071.
The market needs to fall another 43%.
As always, just my opinion.
If you find that upgrading to a new hearing aid, HA, no longer helps, and assuming that you really want to hear, you might consider a cochlear implant, CI. I have one of each. The CI provides comprehension (the ability to understand what is being said), the HA adds "color" (who is speaking and their location). One bit of warning. A CI is not a HA. Unlike a HA, your CI hearing will not improve immediately on activation. You will have to train your brain to convert the electrical pulses on the electrode array to speech. It took me several months. I'v been told some people never do succeed. Most days I only wear the CI.
"Financial markets are artificially priced."
"While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios."
" We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside. That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years!"
Good morning, hc. I'll pass on the options, but I do agree with you that stock picking is risky. I'm slowly selling off my traders and putting the proceeds in a broad based fund rather than adding to cash. The market would have drop a heck of a lot more than it has to get me to invest my cash cushion. Gina Sanchez is waiting for 1850 to buy back the S&P 500. That really isn't low enough for me. My best guess is that the S&P 500 is really is only worth about one times sales per share, ~$1,142 as of 6/30/2014.
Option premiums can be priced using the Black-Scholes equation. Volatility is one of the six inputs. All other things being equal, the higher the volatility, the higher the premium price.
Thanks, hc, but I no longer really care.
Hopefully, cash on hand plus annual income generated on our investments will carry us through (fund annual withdrawals) over the next seven years before anything has to be liquidated at a loss. If my calculations (see below) are correct, in seven years our investments should have recovered to the point where they will have been no worse than having held cash.
Calculation: Number of years required to break-even, that is, generate a growth adjusted internal rate of return of zero (same as cash), assuming a 3.5% annual distribution on the current price and nominal annual growth of 3% on both the distribution & the 40% correction trashed price.
Sean, I'll respond to you, and only you, since you at least ask the right questions and actually think. The rest of the folks here, with a few exceptions, are nothing more than a bunch of mean-spirited, DA, Buffett wannabes, who ride HIS coattails and then, like weekend armchair quarterbacks, jump with joy and exclaim: "WE" won if "THEIR" team does well.
Assumptions: BRK grows BV/s by 10% a year for the next 7 years, during which it does not pay a dividend. In year 8 it pays a dividend equal to 4.8% of BV/s at yearend 7, and then grows both the D/s and BV/s by 5% a year forever thereafter. Calculate the current NPV (IV/BV) of that future stream of dividends using a discount rate of 9%, which is the MINIMUM discount rate that I believe Buffett himself uses. NPV =(((1+10%)/(1+9%))^7)*(4.8%/(9%-5%))
Goodbye and good luck.
PA announcement: jad has now left the board.
Keep cheering a rising price and an expanding multiple. That IS what fools do. At some point in the future you'll come to realize just how overvalued BRK and everything else was today.
BRK has 30B$ of excess cash on the balance sheet and WEB can't find anything worth buying. IIRC, Charlie commented during the Q&A at the DJCO that he had received ~$125,000 in new money and couldn't find anything worth buying. Really? Not even BRK?
When the first buyback at 110% of BV was announced I was shocked. It took awhile, but I finally came to the realization that WEB and Charlie use a businessman's discount rate, not the far lower rate Mr. Market uses.
BRK has grown BV/s by about 10% a year since 2000. Assume for a moment, that starting next year, BRK paid a dividend equal to 5% of BV/s and grew that dividend by 5% per year forever ( do you get it? a 5% dividend + 5% growth = 10% growth without a dividend ). What value, IV/BV, would you place on BRK?
It depends on your discount rate, "r", doesn't it?
IV/BV = D/BV / ( r - g )
I suspect WEB uses 9% and he might value BRK at 125%, (5% / ( 9% - 5% ), which goes a long in explaining why he won't offer 120% or more on a buyback.
I also suspect that WEB's dour business partner is far less optimistic, and probable uses 10%. My guess is he might value BRK at 100%, 1X Book, (5% / ( 10% - 5% ).
Keep holding out for 170%, you fool, with any luck at all, you'll never see it.
I am in the process of simplifying, if not for myself, for my wife's sake. I just can NOT bring myself to pay 50+ times the dividend for anything. That immediately excludes VOO (Vanguard's S&P 500 ETF) and VIG (their Dividend Appreciation ETF). I believe I can reduce my portfolio down to two mutual funds and two ETFs that I can at least tolerate.
Thanks, hc, that was interesting.
I don't screen using EV/EBITDA anymore, but three (CVX, T & VZ) of my current holdings are below 6.5X.
About eight years ago I did successfully trade Accuride, ACW, based indirectly on EV/EBITDA. At the time it was controlled by KKR and my expectation was that while neither the enterprise value, EV, nor the EBITDA would change much during the duration of the trade, the VOC, Value of Equity, would increase as Net Debt decreased (debt was paid down or cash was retained). I got luckly on that one and decided not to repeat that stunt again. I passed when they did Sealy, ZZ, - cute ticker symbol. Much to my chagrin, I mistakenly thought ACW was cheap when I bought it. If I remember correctly, the EV/EBITDA ratio was under 7. I did learn one thing from that trade. A low EV/EBITDA is justifiable IF CapX net of Depreciation is positive AND a large percentage of EBITDA, which is just another way of saying there isn't much Free Cash Flow to Equity hiding within a dollar of EBITDA. That's something to think about when considering any capital intensive business, e.g., automotive.