Clarification need on BRK Dividend statement.

[schin]

Fellow boardmembers,

 

Can someone clarify WEB's comment about getting a return on invested capital that is "something that's worth that for our shareholders?"

 

"It's much more intelligent for people to leave the money in and sell off a little bit if they need the cash. There will come a time, who knows how soon, when we do not think we can lay out $15-20 billion a year and not get something that's worth that for our shareholders."

 

I know he wanted to get a $1 return for a $1 invested. But, how does that work out? If he invest in $1, getting another dollar is 100% return on capital in a year?  Even if he was discounting cash flows, $1 dollar invested at 10% will be discounted back to NPV as $1 invested.. but, what if your return is 3%... the NPV will get your $1.. but, many years down the road.

 

What type of huddle rate or ROIC is he ask about before a dividend?

[nwoodman]

I believe Buffett is referring to a dollar of market value.  So, if instead of Berkshire paying out a DIV,  the money retained increases the market value of the stock by the same amount the economic outcome is slightly better for shareholders due to preferential tax treatment of capital gains, not to mention the potentially superior capital allocation skills - certainly applicable in  my case :)

 

Cheers

 

nwoodman

[seshnath]

Fellow boardmembers,

 

Can someone clarify WEB's comment about getting a return on invested capital that is "something that's worth that for our shareholders?"

 

"It's much more intelligent for people to leave the money in and sell off a little bit if they need the cash. There will come a time, who knows how soon, when we do not think we can lay out $15-20 billion a year and not get something that's worth that for our shareholders."

 

I know he wanted to get a $1 return for a $1 invested. But, how does that work out? If he invest in $1, getting another dollar is 100% return on capital in a year?  Even if he was discounting cash flows, $1 dollar invested at 10% will be discounted back to NPV as $1 invested.. but, what if your return is 3%... the NPV will get your $1.. but, many years down the road.

 

What type of huddle rate or ROIC is he ask about before a dividend?

Here's the relevant extract from Owner's Manual.

"We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.

I should have written the “five-year rolling basis” sentence differently, an error I didn’t realize until I received a question about this subject at the 2009 annual meeting.

When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early as 1971-75, well before I wrote this principle in 1983.

The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense"

 

Two years ago, I believe, someone asked him a question on this part and made him revise this part to what it is now.