Tuesday, 3 April 2018

The ever-increasing yield created by the durable competitive advantage


To belabor the point, because it is definitely worth belaboring, let's look at a couple of Warren's other favorite durable competitive advantage companies to see if the yields on their equity bonds/shares have increased over time:

In 1998 Moody's' reported after-tax earnings of $.41 per share. By 2007 Moody's after-tax earnings had grown to $2.58 a share. Warren paid $10.38 a share for his Moody's equity bonds, and today they are earning an after-tax yield of 24% [$2.58 / $10.38 = 24%], which equates to a pretax yield of 38%.

In 1998 American Express had after-tax earnings of $1.54 a share. By 2008 its after-tax earnings had increased to $3.39 a share. Warren paid $8.48 a share for his American Express equity bonds, which means they are currently yielding an after-tax 40% rate of return [$3.39/ $8.48= 40%], which equates to a 61% pretax rate of return.

Long-time Warren favorite Procter & Gamble earned an after-tax $1.28 a share in 1998. By 2007 it had after-tax earnings of $3.31 a share. Warren paid $10.15 a share for his Procter & Gamble equity bonds, which are now yielding an after-tax 32% [$3.31 / $10.15= 32%], which equates to a pretax return of 49%.

With See's Candy Warren bought the whole company for $25 million back in 1972. In 2007 it had pretax earnings of $82 million, which means his See's equity bonds are now producing an annual pretax yield of 328% [$82m / $25m = 328%] on his original investment.

With all these companies, their durable competitive advantage caused their earnings to increase year after year, which, in turn, increased the underlying value of the business. Yes, the stock market may take its own sweet time acknowledging this increase, but it will eventually happen, and Warren has banked on that "happening" many, many times.

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