Showing posts with label Return on Retained Capital. Show all posts
Showing posts with label Return on Retained Capital. Show all posts

Saturday 21 September 2019

The Possibility of Reinvesting More Capital in companies with High Returns on Capital

Bear in mind that the potential for companies with high returns on capital to reinvest a lot of capital are limited, since they tend not be be very capital intensive (e.g. Nestle Malaysia and Dutch Lady).

Furthermore, the market will probably be correctly pricing such gems which are capable of obtaining high returns over time, meaning we must wait for the right moment to acquire them at a reasonable price, because they are rarely gong to come cheap.

If some of these companies with high returns on capital in attractive sectors also offer a certain amount of growth, facilitating reinvestment of capital, then we are looking at a gem, with the added benefit of being coherent with our long term investment philosophy.

If a company can reinvest with a 20% return on investment over the next 20 years and we are able to buy the stock at a reasonable price, then the return on our investment will be close to this annual 20% over 20 years.

Thursday 15 August 2013

Allocation of capital is crucial to business and investment management.

Managers and owners should think hard about the circumstances under which earnings should be retained and under which they should be distributed.

1.   All earnings are not created equal.

In many businesses, particularly those that have high asset/profit ratios, inflation causes some or all of the reported earnings to become ersatz (inferior substitutes).  The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends.  Were these earnings to be paid out, the business would lose ground in one or more of the following areas: its ability to maintain its unit volume of sales, its long-term competitive position, its financial strength.  No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused.

2.  Restricted earnings are seldom valueless to owners, but they often must be discounted heavily.  In effect, they are conscripted by the business, no matter how poor its economic potential.

(This retention-no-matter how unattractive-the-return situation was communicated unwittingly in a marvelously ironic way by Consolidated Edison a decade ago.  At the time, a punitive regulatory policy was a major factor causing the company's stock to sell as low as one-fourth of book value; i.e., every time a dollar of earnings was retained for reinvestment in the business, that dollar was transformed into only 25 cents of market value.  But, despite this gold-into-lead process, most earnings were reinvested in the business rather than paid to owners.  Meanwhile, at construction and maintenance sites throughout New York, signs proudly proclaimed the corporate slogan, "Dig We Must.")

3.  The much-more-valued unrestricted variety of earnings may, with equal feasibility, be retained or distributed.  Management should choose whichever course makes greater sense for the owners of the business.

This principle is not universally accepted.  For a number of reasons, managers like to withhold unrestricted, readily distributable earnings from shareholders - to expand the corporate empire over which the managers rule, to operate from a position of exceptional financial comfort, etc.  But there is only one valid reason for retention.  Unrestricted earnings should be retained only when there is a reasonable prospect - backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners.  This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors

4.  In judging whether managers should retain earnings, shareholders should not simply compare total incremental earnings in recent years to total incremental capital because that relationship may be distorted by what is going on in a core business.

During an inflationary period, companies with a core business characterized by extraordinary economic can use small amounts of incremental capital in that business at very high rates of return.  But unless they are experiencing tremendous unit growth, outstanding businesses by definition generate large amounts of excess cash.  If a company sinks most of this money in other businesses that earn low returns, the company's overall return on retained capital may nevertheless appear excellent because of the extraordinary returns being earned by the portion of earnings incrementally invested in the core business.  The situation is analogous to a Pro-Am golf event:  Even if all the amateurs are hopeless duffers, the team's best-ball score will be respectable because of the dominating skills of the professional.


Ref:  Warren Buffett

Thursday 30 August 2012

KAF - Return on Retained Earnings

KAF
Year DPS EPS Retained EPS
2002 4.5 5.4 a 0.9
2003 5.4 7.9 2.5
2004 6.3 12.6 6.3
2005 5.4 13.7 8.3
2006 5.4 9.9 4.5
2007 30.1 15.8 -14.3
2008 5.6 12.5 6.9
2009 5.6 -2.5 -8.1
2010 5.6 17.3 11.7
2011 11.3 16.2 b 4.9
2012
Total 85.2 c 108.8 d 23.6 e
From 2002 to 2011
EPS increase (sen) b-a 10.8
DPO c/d 78%
Return on retained earnings  (b-a)/e 46%
(Figures are in sens)

CIMB - Return on Retained Earnings

CIMB
Year DPS EPS Retained EPS
2002 1.1 10.8 a 9.7
2003 1.9 14.9 13
2004 3.6 14 10.4
2005 7.2 15 7.8
2006 5.4 23.6 18.2
2007 14.6 30.9 16.3
2008 9.3 27.7 18.4
2009 9.9 38.3 28.4
2010 27.3 47 19.7
2011 20 50.9 b(P) 30.9
2012
Total 100.3 c 273.1 d 172.8 e
From 2002 to 2011
EPS increase (sen) b-a 40.1
DPO c/d 37%
Return on retained earnings  (b-a)/e 23%
(Figures are in sens)

PIE - Return on Retained Earnings

PIE
Year DPS EPS Retained EPS
2002 10 12.4 a 2.4
2003 10 12.2 2.2
2004 12 18.1 6.1
2005 12 27.2 15.2
2006 14.6 41.4 26.8
2007 22 55.6 33.6
2008 28.7 53 24.3
2009 26.3 39.5 13.2
2010 26.3 40.1 13.8
2011 26.3 59.5 b(P) 33.2
2012
Total 188.2 c 359 d 170.8 e
From 2002 to 2011
EPS increase (sen) b-a 47.1
DPO c/d 52%
Return on retained earnings  (b-a)/e 28%
(Figures are in sens)

Sime Darby - Return on Retained Earnings

Sime Darby
Year DPS EPS Retained EPS
2002
2003
2004
2005
2006
2007 0 31.4 a 31.4
2008 38.2 56.6 18.4
2009 19.1 39.1 20
2010 10 14.4 4.4
2011 30 61.9 b 31.9
2012
Total 97.3 c 203.4 d 106.1 e
From 2007 to 2011
EPS increase (sen) b-a 30.5
DPO c/d 48%
Return on retained earnings  (b-a)/e 29%
(Figures are in sens)

Ajinomoto - Return on Retained Earnings

Ajinomoto
Year DPS EPS Retained EPS
2002 5.3 17 a 11.7
2003 6.5 19.9 13.4
2004 7.9 21.6 13.7
2005 7.9 14.6 6.7
2006 7.9 9.9 2
2007 8.9 24.7 15.8
2008 12.9 34.4 21.5
2009 15 31.2 16.2
2010 15.8 36.6 20.8
2011 17.3 42.6 b 25.3
2012
Total 105.4 c 252.5 d 147.1 e
From 2002 to 2011
EPS increase (sen) b-a 25.6
DPO c/d 42%
Return on retained earnings  (b-a)/e 17%
(Figures are in sens)

BAT - Return on Retained Earnings

BAT
Year DPS EPS Retained EPS
2002 201 232 a 31
2003 298 266 -32
2004 247 283 36
2005 216 208 -8
2006 275 252 -23
2007 329 256 -73
2008 263 284 21
2009 250 262 12
2010 239 256 17
2011 276 252 b (P) -24
2012
Total 2594 c 2551 d -43e
From 2002 to 2011
EPS increase (sen) b-a 20.0
DPO c/d 102%
Return on retained earnings  (b-a)/e -47%
(Figures are in sens)

Fraser & Neave - Return on Retained Earnings


Fraser & Neave
Year DPS EPS Retained EPS
2002 12 24.6 a 12.6
2003 10 29.1 19.1
2004 18 32.7 14.7
2005 27.4 37 9.6
2006 31.7 40.1 8.4
2007 33.2 42.9 9.7
2008 39.8 46.8 7
2009 35.3 68.2 32.9
2010 45.5 86.3 40.8
2011 183 88.7 b -94.3
2012
Total 435.9 c 496.4 d 60.5 e
From 2002 to 2011
EPS increase (sen) b-a 64.1
DPO c/d 88%
Return on retained earnings  (b-a)/e 106%
(Figures are in sens)

Coastal - Return on Retained Earnings

Coastal
Year DPS EPS Retained EPS
2002
2003 0 3 a 3
2004 0.9 3.1 2.2
2005 0.6 3.5 2.9
2006 0.7 7.5 6.8
2007 1.4 14.6 13.2
2008 2.6 20.3 17.7
2009 2.2 33.2 31
2010 3.7 41 37.3
2011 8.3 39.5 b(P) 31.2
2012
Total 20.4 c 165.7 d 145.3e
From 2003 to 2011
EPS increase (sen) b-a 36.5
DPO c/d 12%
Return on retained earnings  (b-a)/e 25%
(Figures are in sens)

Tower Reit - Return on Retained Earnings

Tower Reit
Year DPS EPS Retained EPS
2002
2003
2004
2005
2006 0 7.5 a 7.5
2007 9.3 8.5 -0.8
2008 9.5 9.9 0.4
2009 9.4 10.7 1.3
2010 9.5 10.6 1.1
2011 10.7 11.9 1.2
2012
Total 48.4 c 59.1 d 10.7 e
From 2006 to 2011
EPS increase (sen) b-a 4.4
DPO c/d 82%
Return on retained earnings  (b-a)/e 41%
(All figures are in sens)

Starhill Reit - Return on Retained Earnings

Starhill Reit
Year DPS EPS Retained EPS
2002
2003
2004
2005
2006 2.5 5.6a 3.1
2007 6.7 6.9
0.2
2008 6.9 6.9 0
2009 6.9 6.9 0
2010 6.5 6 -0.5
2011 6.5 4.9 -1.6
2012
Total 36 c 37.2 d 1.2 e
From 2006 to 2011
EPS increase (sen) b-a -0.7
DPO c/d 97%
Return on retained earnings  (b-a)/e -58%
(All figures are in sens)

Axis Reit - Return on Retained Earnings

Axis Reit
Year DPS EPS Retained EPS
2002
2003
2004
2005 0 13 13
2006 10.9 12.8 1.9
2007 12.9 13.6 a 0.7
2008 14.9 15.2 0.3
2009 17.9 14 -3.9
2010 14.7 14 -0.7
2011 19 14.4 b (P) -4.6
2012
Total 90.3 c 97 d 6.7
From 2005 to 2011
EPS increase (sen) b-a 1.4
DPO c/d 93%
Return on retained earnings  (b-a)/e 21%
(All figures are in sens)

Boustead Reit - Return on Retained Earnings

Boustead Reit
Year DPS EPS Retained EPS
2002
2003
2004
2005
2006
2007 3.7 10.6 a 6.9
2008 10.9 11 0.1
2009 11 11.2 0.2
2010 9.4 12 2.6
2011 10.2 13.7 b (E) 3.5
2012
Total 45.2 c 58.5 d 13.3
From 2007 to 2011
EPS increase (sen) b-a 3.1
DPO c/d 77%
Return on retained earnings  (b-a)/e 23%
(All figures are in sens)

AL-'AQAR Healthcare Reit - Return on Retained Earnings

AL-'AQAR Healthcare Reit
Year DPS EPS Retained EPS
2002
2003
2004
2005
2006 0 7.3 a 7.3
2007 6.4 7.5 1.1
2008 7.7 7.4 -0.3
2009 8.4 7.1 -1.3
2010 8.2 7.3 -0.9
2011 8.5 7.3 b (E) -1.2
2012
Total 39.2 c 43.9 d 4.7
From 2006 to 2011
EPS increase (sen) b-a 0.0
DPO c/d 89%
Return on retained earnings  (b-a)/e 0%
(All figures are in sens)

Latexx - Return on Retained Earnings

Latexx
Year DPS EPS Retained EPS
2002 0 -29.7 a -29.7
2003 0 -16.9 -16.9
2004 0 -12 -12
2005 0 5.2 5.2
2006 0 4.8 4.8
2007 0 2.7 2.7
2008 0 8.4 8.4
2009 2 27 25
2010 5 29.9 24.9
2011 5 19.7 b (P) 14.7
2012
Total 12 c 39.1 d 27.1e
From 2002 to 2011
EPS increase (sen) b-a 49.4
DPO c/d 31%
Return on retained earnings  (b-a)/e 182%
(All figures are in sens)

Aeon - Return on Retained Earnings

Aeon
Year DPS EPS Retained EPS
2002 3.6 17.2 13.6
2003 3.6 18.1 14.5
2004 4.3 18.3 14
2005 5.4 20.9 15.5
2006 5.4 23.7 18.3
2007 5.8 30 24.2
2008 8.3 34.4 26.1
2009 9 38 29
2010 9 48.6 39.6
2011 12 52.8 P 40.8
2012
Total 66.4 302 235.6
From 2002 to 2011
EPS increase (sen) 35.6
DPO 22%
Return on retained earnings  15%
(All figures are in sens)

Scientex - Return on Retained Earnings

Scientex
Year DPS EPS Retained EPS
2002 1.4 2.9 1.5
2003 1.4 1.9 0.5
2004 1.4 8.8 7.4
2005 4.2 12.2 8
2006 5.2 14.5 9.3
2007 2.2 17.2 15
2008 5.2 16.9 11.7
2009 5.2 16.8 11.6
2010 8 26.2 18.2
2011 12 33.6 21.6
2012
Total 46.2 151 104.8
From 2002 to 2011
EPS increase (sen) 30.7
DPO 31%
Return on retained earnings  29%
(All figures are in sens)