Thursday, 1 March 2012

Buffett's Big 4 Investments in Marketable Securities - American Express, Coca Cola, IBM and Wells Fargo

-  Finally, we made two major investments in marketable securities:

  • (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
  • (2) 63.9 million shares of IBM that cost us $10.9 billion
Counting IBM, we now have large ownership interests in four exceptional companies:

  • 13.0% of American Express, 
  • 8.8% of Coca-Cola, 
  • 5.5% of IBM and 
  • 7.6% of Wells Fargo. 
  • (We also, of course, have many smaller, but important, positions.)

Comment:  "Buying wonderful company at fair price" and "holding period is forever".   This is classically Buffett's style.

We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings.

Comment:  Buffett buys and holds for the long term.  He keeps these companies for their long-term prospects, knowing that he will obtain good returns from these companies, either through the dividends they distribute or through the undistributed growing earnings attributable to the owners from its reinvested retained earnings.

-  Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.

Comment:  Only the dividends received are reported in Berkshire Hathaways account.  This is only a fraction (36%) of the actual earnings of $3.3 billion.  Buffett opines that these dividends will continue to grow as the retained earnings fuel earnings gains in future years.  I like the way Buffett projects the future earnings of these companies.

  • For present earnings of $3 billion to grow to $7 billion in 10 years, he is projecting a CAG of 8.84%.  
  • Projecting the dividends of $862 million growing to $2 billion in a decade is the equivalent of the dividends growing at a CAG of  8.77% for the same period.  
  • The growth rates used in his projections are very conservative (8.84% and 8.77%).  Maybe Buffett just uses his simple rule of thumb of doubling the earnings or dividends every 10 years.
  • Once again, he reiterates that $1 retained earnings by the company should deliver at least $1 value to the shareholder.

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