Warren Buffett's Historical Investments (Part 6)
Hershey Foods: Buffett is rumored to have purchased Hershey Foods on several occasions, but we have no confirmed purchase to sink our teeth into. He has used it as an example in discussing the concept of a durable competitive advantage. Its been making chocolate forever and is the largest producer in America. The majority of the voting stock fo the company is held in trust for the benefit of the Milton Hershey School for Orphans. The company's founder, Milton Hershey, left the majority of his wealth to benefit the children who had made him rich. What this means to you the investor is that there is one large shareholder - the trust for the orphanage - which can wield an incredible amount of weight. The company gets high ROE and ROTC. Its per share earnings have been growing at an annual rate of 9.9% for the last 10 years. It traded at a PE of 33 during the bubble, which is too steep for this business. Try to get it at a PE below 15, which you could ahve done up until 1996. Even if you have a sweet tooth, wait for a recession or panic sell-off to take a bite.
ROE: high
ROTC: high
Per share earnings annual growth rate: 9.9% (the last 10 years)
Price bought: Wait for a recession or panic sell-off to buy
Interpublic Group of Companies: In 1974, Interpublic was the largest company in the international advertising business. Now it is number three. Advertising agencies, according to Buffett, earn a royalty on the growth of other businesses. When manufacturers want to take their products to market, they have to advertise, so they use an agency.
Agencies produce and place ads in the media and are paid a percentage of what the advertiser spends for these services. Agencies are almost inflation-proof. Inflation causes advertisers to spend more for the same amount of work, and the more advertisers spend, the more the agencies make. Agencies are service businesses so they spend only modesly on capital equipment, which means that profits don't go toward replacing worn-out plant and equipment. Plus, only 4% of U.S. advertisers change agencies every year! In other words, those big accounts stay in place. Many of the large agencies that dominated the marketplace years ago still dominate it today. Seven of the top ten are in their fifth or sixth generration of management. The key here is that there is no limit on how big they can grow. As long as businesses grow and the media continue to be where manufacturers take their products to market, advertising agencies will continue to grow as well.
The numbers on Interpublic are great. For the last 10 years it has earned an annual ROE of 16% or better, with the last 3 years at over 20%. Per share earnings for the last 10 years have been growing at an annual rate of 13.8%. Buffett used the 1973-74 recession to buy 17% of Interpublic, which traded as low as $3 a share, against earnings of $0.81. He paid a total $4,531,000 for 592,650 shares, for an averge price of $7.65 per share. We don't know when he sold his interest in this company. We do know that if he had held his position, he would have 74.6 million shares, adjusted for stock splits, worth approximately $2.8 billion. This equates to a compounding annual rate of return of approximately 27% for the 27-year period. If you're patient, you can get a great price on this one. During the 1999 bubble, it traded at a PE of 33 - too high for even this wonderful business. In the midnineties, you could have bought it for 14 x earnings.
Price bought: average price $7.65 (bought in 1973-74 recession, was traded as low as $3 a share)
Earnings: $0.81 a share
ROE: > 16% (over the last 10 years, with last 3 years, ROE greater than 20%)
Per share earnings annual growth rate: 13.8% (over last 10 years)
Kaiser Aluminium & Chemical Corp: This is one of the few investment mistakes that Buffett made in his early days. He bought based on earnings in good "businesslike" fashion, but the earnings soon vanished as they often do in a price-competitive business. He lost money on this one.
McDonald's Corp: McDonald's made the hamburger into a brand-name product with some 28 thousand restaurants - no easy feat. Over the last 10 years the company has had a yearly ROE between 16% and 20%, which is delicious. And its per share earnings have been growing at an annual rate of 12%. It's a great company, and at the right price it is a great investment. Buffett acquired 60 million shares in 1994 and 1995 for $1.2 billion, which equates to $20 a share. He was then rumoured to be selling them in 1997 to 1999 for between $30 and $45 a share as he sold into the bubble. This turned out to be a wise decision. At the right price, Buffett will once agains be buying McDonald's shares, and so would you.
Price bought: average $20 a share (in 1994 and 1995)
ROE: 16%-20% (over the last 10 years)
Per share earnings annual growth rate: 12% (the last 10 years)
Price sold: $30 - $45 a share ( in 1997 to 1999, sold into the bubble)
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Sunday 7 June 2009
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 5)
Geico: This was acquired by Berkshire. Buffett's initial big investment was made as the company was on the verge of insolvency. Buffett decided to ride to the rescue, believing that the company's durable competitive advantage was still intact. He was right and watched his $45 million investment grow over the next 15 years to more than $2.3 billion. That equates to a compounding annual rate of return of 29.9% - the stuff investment legends are made of.
Price bought: $45 million
Price 15 years later: $2.3 billion
CAGR: 29.9%
General Electric: Originally GE had a lockdownon the electrification of the planet. For most people electricity is a fact of life, but a mere one hundred years ago it wasn't. One company provided the knowledge and equipment to wire the planet, and that company was GE. And it made a fortune. Today GE is one of the largest and most diversified industrial giants on earth. With this position, it has the financial power to play in any game it wants.
Buffett has long admired this company - it is a Buffett Foundation holding - but has never been able to buy a big piece at a price he thinks is attractive. The ROE for the last 10 years has fluctuated between 18% and 23% (which is great) and ROTC between 16% and 25%. The per share earnings have been growing at an annual compounding rate of 11.8%, which is also electrifying. GE carries only $400 million in long-term debt against $10 billion in earnings. You need a real good recession to buy this one at a fair price. During the 1999 bubble it traded at a PE of 36, which is no bargain. Take a strong look anytime the PE drops below 15, where it traded in the 80s and early 90s.
ROE: 18% - 23%
ROTC: 16% - 25%
Per share earnings annual growth rate: 11.8%
Long-term Debt: $400 million
Earnings: $10 billion
PE: 36 (during the bubble in 1999) Buy at PE below 15
General Foods Corp: In 1979, Buffett began buying up the stock of a food company called General Foods, paying an average price of $37 a share for approximately 4 million shares. Buffett saw strong earnings, $5.12 a share, which had been growing at an average annual rate of 8.7%.
This gave him an initial return of 13.8%, which he could argue was going to grow at 8.7% a year. Then, in 1985, the Philip Morris Company saw the value of General Foods' many brand-name products, which created a strong and expanding earnings base, and bought all of Buffet's General Foods stock for $120 a share in a tender offer for the entire company. This gave Buffett a pretax annual compounding return on his investment of approximately 21%. That's right, a pretax annual compounding return of 21%. A nice number in anybody's book.
Price bought: $37 a share (1979)
Earnings: $5.12 a share
Per share earnings annual growth rate: 8.7%
Initial return: 13.8%
Price sold: $120 (1985, tender offer by Philip Morris Company)
CAGR: 21% (pretax return)
Gillette: Razor blades and batteries wear out quickly, and people have to buy more of them if they want to be clean shaven or to keep their portable electrical devices humming. Gillette knows how to make money. This is a Berkshire holding. For the last 10 years the ROE has been above 30% and the ROTC above 20%. Per share earnings over the last 10 years have grown at an annual rate of 14%. During the 1999 bubble it traded at a PE of 40, which is way too high for this company. If you can get it at a PE below 15, you can make some money.
ROE: > 30 % (the last 10 years)
ROTC: > 20% (the last 10 years)
Per share earnings annual growth rate: 14% (the last 10 years)
PE: 40 (during the 1999 bubble). Fair price PE < 15
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Geico: This was acquired by Berkshire. Buffett's initial big investment was made as the company was on the verge of insolvency. Buffett decided to ride to the rescue, believing that the company's durable competitive advantage was still intact. He was right and watched his $45 million investment grow over the next 15 years to more than $2.3 billion. That equates to a compounding annual rate of return of 29.9% - the stuff investment legends are made of.
Price bought: $45 million
Price 15 years later: $2.3 billion
CAGR: 29.9%
General Electric: Originally GE had a lockdownon the electrification of the planet. For most people electricity is a fact of life, but a mere one hundred years ago it wasn't. One company provided the knowledge and equipment to wire the planet, and that company was GE. And it made a fortune. Today GE is one of the largest and most diversified industrial giants on earth. With this position, it has the financial power to play in any game it wants.
Buffett has long admired this company - it is a Buffett Foundation holding - but has never been able to buy a big piece at a price he thinks is attractive. The ROE for the last 10 years has fluctuated between 18% and 23% (which is great) and ROTC between 16% and 25%. The per share earnings have been growing at an annual compounding rate of 11.8%, which is also electrifying. GE carries only $400 million in long-term debt against $10 billion in earnings. You need a real good recession to buy this one at a fair price. During the 1999 bubble it traded at a PE of 36, which is no bargain. Take a strong look anytime the PE drops below 15, where it traded in the 80s and early 90s.
ROE: 18% - 23%
ROTC: 16% - 25%
Per share earnings annual growth rate: 11.8%
Long-term Debt: $400 million
Earnings: $10 billion
PE: 36 (during the bubble in 1999) Buy at PE below 15
General Foods Corp: In 1979, Buffett began buying up the stock of a food company called General Foods, paying an average price of $37 a share for approximately 4 million shares. Buffett saw strong earnings, $5.12 a share, which had been growing at an average annual rate of 8.7%.
This gave him an initial return of 13.8%, which he could argue was going to grow at 8.7% a year. Then, in 1985, the Philip Morris Company saw the value of General Foods' many brand-name products, which created a strong and expanding earnings base, and bought all of Buffet's General Foods stock for $120 a share in a tender offer for the entire company. This gave Buffett a pretax annual compounding return on his investment of approximately 21%. That's right, a pretax annual compounding return of 21%. A nice number in anybody's book.
Price bought: $37 a share (1979)
Earnings: $5.12 a share
Per share earnings annual growth rate: 8.7%
Initial return: 13.8%
Price sold: $120 (1985, tender offer by Philip Morris Company)
CAGR: 21% (pretax return)
Gillette: Razor blades and batteries wear out quickly, and people have to buy more of them if they want to be clean shaven or to keep their portable electrical devices humming. Gillette knows how to make money. This is a Berkshire holding. For the last 10 years the ROE has been above 30% and the ROTC above 20%. Per share earnings over the last 10 years have grown at an annual rate of 14%. During the 1999 bubble it traded at a PE of 40, which is way too high for this company. If you can get it at a PE below 15, you can make some money.
ROE: > 30 % (the last 10 years)
ROTC: > 20% (the last 10 years)
Per share earnings annual growth rate: 14% (the last 10 years)
PE: 40 (during the 1999 bubble). Fair price PE < 15
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 4)
Freddie Mac: This is a wonderful company that buys residential mortgages from banks and mortgage brokers and securitizes them before selling them to investors. At one time, Buffett owned a ton of this stock, but he had sold it because the nature of the company changed. It got more risky and Buffett hates risk.
F.W. Woolworth Company: This was once one of the largest retail chains in America. Buffett bought it in 1979 for $20 a share against earnings of $6.02 a share, which equates to an initial return of 30%. It had a book value of $41 a share. By 1985 it was at $50 a share, which equates to an annual rate of return of 20%. (Woolworth is no longer a business concern at present.)
Price bought: $20 a share (in 1979)
Earnings: $6.02 a share
Initial return: 30%
Book value: $41 a share
Price in 1985: $50 a share
Gallaher Group Plc: This company owns Gallaher Tobacco Limited, the market leader in the United Kingdom. It makes Benson & Hedges cigarettes. Gallaher Tobacco sold its American tobacco operations in 1994 and said good-bye to all that bad press and possible expense associated with cancer lawsuits. Cigarette products have great profit margins, which mean big bucks. Gallaher owns other things as well, but it is tobacco that reaps the bountiful harvest. The tobacco operations are a classic durable-competitive-advantage business. English tobacco companies don't face the kind of lawsuits American ones do, so the downside risk is smaller. This stock shows up as a Buffett Foundation holding, though when it was purchased and for how much we can't say.
Gannett Company: Warren Buffett's 1994 purchase of shares in Gannett, the largest newspaper publisher in the United States with 99 other newspapers, was made during an advertising recession for $24 a share, or 15x earnings. During the 1999 bubble it traded at 24 x earnings. He could have sold it in 2002 for $76 a share, which would have given him an annual rate of return of 15.2%. Not too shabby.
Price bought: $24 a share (15 x earnings, in 1994 during an advertising recession)
Price in 2002: $76 a share
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Freddie Mac: This is a wonderful company that buys residential mortgages from banks and mortgage brokers and securitizes them before selling them to investors. At one time, Buffett owned a ton of this stock, but he had sold it because the nature of the company changed. It got more risky and Buffett hates risk.
F.W. Woolworth Company: This was once one of the largest retail chains in America. Buffett bought it in 1979 for $20 a share against earnings of $6.02 a share, which equates to an initial return of 30%. It had a book value of $41 a share. By 1985 it was at $50 a share, which equates to an annual rate of return of 20%. (Woolworth is no longer a business concern at present.)
Price bought: $20 a share (in 1979)
Earnings: $6.02 a share
Initial return: 30%
Book value: $41 a share
Price in 1985: $50 a share
Gallaher Group Plc: This company owns Gallaher Tobacco Limited, the market leader in the United Kingdom. It makes Benson & Hedges cigarettes. Gallaher Tobacco sold its American tobacco operations in 1994 and said good-bye to all that bad press and possible expense associated with cancer lawsuits. Cigarette products have great profit margins, which mean big bucks. Gallaher owns other things as well, but it is tobacco that reaps the bountiful harvest. The tobacco operations are a classic durable-competitive-advantage business. English tobacco companies don't face the kind of lawsuits American ones do, so the downside risk is smaller. This stock shows up as a Buffett Foundation holding, though when it was purchased and for how much we can't say.
Gannett Company: Warren Buffett's 1994 purchase of shares in Gannett, the largest newspaper publisher in the United States with 99 other newspapers, was made during an advertising recession for $24 a share, or 15x earnings. During the 1999 bubble it traded at 24 x earnings. He could have sold it in 2002 for $76 a share, which would have given him an annual rate of return of 15.2%. Not too shabby.
Price bought: $24 a share (15 x earnings, in 1994 during an advertising recession)
Price in 2002: $76 a share
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 3)
Coca-Cola Co.: Coca-Cola has the mother lode of durable competitive advantages. Coke is the world's top soft-drink company. It sells more than 230 brands of beverages, including coffees, juices, and teas. It commands 50% of the global soft-drink market and 2% of the world's daily fluid consumption. This is one of the biggest bets that Buffett ever made, and it's also one of his most profitable. Buy this one during a recession and panic sell-off. Under no circumstances should you ever pay more than 30 times earnings for it. Expect Buffett to be buying more anytime it drops to a PE below 25.
Price bought: During a recession and panic sell-off
Cox Communications: Provides cable TV service to 6 million customers and digital TV to 350,000 subscribers. Media conglomerate Cox Enterprises contorls 68% of Cox Communications' stock. It also offers Internet access and local and long-distance phone service. It is the monopoly cable TV provider in most of the markets it services. Think of it as 6.3 million people who are addicted to channel surfing sending it checks each month. Cox's net profit margin was 23% in 2000. Compare that to Ford Motors's net profit margin of 1% and you can see why Buffett loves the cable TV business and abhors the automobile business. This is a Buffett Foundation holding.
The Walt Disney Company: Buffett first bought into Walt Disney Company in 1966, when it was selling for $53 a share, which meant that the market was valuing the entire business for $80 million, less than Snow White and the other cartoons were worth. Included in the deal you also got Disneyland. Buffett bought $5 million worth and sold it a year later for $6 million.
Price bought: Bought $5 million at $53 a share (1966, when Disney was undervalued)
Price sold: Sold for $6 million (1967)
(If this 5% stake were kept, it is now worth $1 billion)
He says that if he had kept that 5% stake it would now be worth more than $1 billion (which equates to a 19% compounding annual rate of return for the 30-year period). Lessons like this taught Buffett that holding companies with a durable competitive advantage for the long term was the easiest way to become superrich. He later acquired 21.5 million shares of Disney when it acquired Capital Cities in 1995. At the top of the bullmarket between 1998 and 2000, he was rumored to be selling Disney directly in the market, and also, he sold it indirectly in the General Reinsurance deal.
Price bought: Acquired in 1995 when Disney acquired Capital Cities.
Price sold: Rumored to be selling at the top of bullmarket (1998 - 2000)
Disney is the second-largest media conglomerate in the world. It owns the ABC television network, TV stations, radio stations, theme park, movie studios, and of course, the monarch of the Magic Kingdom - Mickey Mouse. Wait for a recession to buy this one and then hold on for the ride of your life.
Exxon Corporation: In the early eighties the Fed jacked up interest rates to kill inflation. It also killed the economy and the stock market. Lots of stocks were selling cheap ut Buffett placed his bet on Exxon, the largest and best run of the oil companies, on the theory that no matter what happened to the economy, individuals and businesses would keep guzzling oil. The high interest rates kept Exxon's stock down to $44 a share, against earnings of $6.77, which equates to an initial return of 15.2%. It has been growing its per share earnings at an annual rate of 6.7% and had been buying back its own shares. Buffett paid approximately 6.5 times earnings. By 1987 it was trading at $87 a share, which would have given him an annual compounding rate of return of approximately 25%.
Price bought: $44 a share (at 6.5x earnings, in early 80s)
Earnings: $6.77 a share
Initial return: 15.2%
Per share earnings annual growth rate: 6.7%
Price at 1987: $87 a share
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Coca-Cola Co.: Coca-Cola has the mother lode of durable competitive advantages. Coke is the world's top soft-drink company. It sells more than 230 brands of beverages, including coffees, juices, and teas. It commands 50% of the global soft-drink market and 2% of the world's daily fluid consumption. This is one of the biggest bets that Buffett ever made, and it's also one of his most profitable. Buy this one during a recession and panic sell-off. Under no circumstances should you ever pay more than 30 times earnings for it. Expect Buffett to be buying more anytime it drops to a PE below 25.
Price bought: During a recession and panic sell-off
Cox Communications: Provides cable TV service to 6 million customers and digital TV to 350,000 subscribers. Media conglomerate Cox Enterprises contorls 68% of Cox Communications' stock. It also offers Internet access and local and long-distance phone service. It is the monopoly cable TV provider in most of the markets it services. Think of it as 6.3 million people who are addicted to channel surfing sending it checks each month. Cox's net profit margin was 23% in 2000. Compare that to Ford Motors's net profit margin of 1% and you can see why Buffett loves the cable TV business and abhors the automobile business. This is a Buffett Foundation holding.
The Walt Disney Company: Buffett first bought into Walt Disney Company in 1966, when it was selling for $53 a share, which meant that the market was valuing the entire business for $80 million, less than Snow White and the other cartoons were worth. Included in the deal you also got Disneyland. Buffett bought $5 million worth and sold it a year later for $6 million.
Price bought: Bought $5 million at $53 a share (1966, when Disney was undervalued)
Price sold: Sold for $6 million (1967)
(If this 5% stake were kept, it is now worth $1 billion)
He says that if he had kept that 5% stake it would now be worth more than $1 billion (which equates to a 19% compounding annual rate of return for the 30-year period). Lessons like this taught Buffett that holding companies with a durable competitive advantage for the long term was the easiest way to become superrich. He later acquired 21.5 million shares of Disney when it acquired Capital Cities in 1995. At the top of the bullmarket between 1998 and 2000, he was rumored to be selling Disney directly in the market, and also, he sold it indirectly in the General Reinsurance deal.
Price bought: Acquired in 1995 when Disney acquired Capital Cities.
Price sold: Rumored to be selling at the top of bullmarket (1998 - 2000)
Disney is the second-largest media conglomerate in the world. It owns the ABC television network, TV stations, radio stations, theme park, movie studios, and of course, the monarch of the Magic Kingdom - Mickey Mouse. Wait for a recession to buy this one and then hold on for the ride of your life.
Exxon Corporation: In the early eighties the Fed jacked up interest rates to kill inflation. It also killed the economy and the stock market. Lots of stocks were selling cheap ut Buffett placed his bet on Exxon, the largest and best run of the oil companies, on the theory that no matter what happened to the economy, individuals and businesses would keep guzzling oil. The high interest rates kept Exxon's stock down to $44 a share, against earnings of $6.77, which equates to an initial return of 15.2%. It has been growing its per share earnings at an annual rate of 6.7% and had been buying back its own shares. Buffett paid approximately 6.5 times earnings. By 1987 it was trading at $87 a share, which would have given him an annual compounding rate of return of approximately 25%.
Price bought: $44 a share (at 6.5x earnings, in early 80s)
Earnings: $6.77 a share
Initial return: 15.2%
Per share earnings annual growth rate: 6.7%
Price at 1987: $87 a share
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 2)
Bristol-Myers Squibb: This company sold about $22 billion in proprietary medical products, ethical pharmaceuticals and health and beauty products in 2000. It has been in business since 1887, and unless people are going to stop getting sick, it is going to be in business for a long time to come. We believe Buffett was buying it in 1993, on the threat of government regulation, for around $13 a share, with earnings of $1.10 a share and historical returns on equity and capital of over 30%. So far Buffett has earned a 23% average annual return on this investment.
Price bought: $13 a share (in 1993, on threat of government regulation)
Earnings: $1.10 a share
Historical ROE and ROTC: >30%
Campbell Soup: Campbell's has 70% of the condensed-soup market. It also owns Franco-American, V8, Swanson, Pepperidge Farm, Vlasic, Mrs. Paul's, Prego, and dozens of other brand names that you might find in your grocery basket. The durability of this company's competitive advantage is amazing. Winter comes along and people start buying soups. Look for recessions, panic sell-offs, a warm winter, which can hurt soup sales, or just a business screwup to make the stock attractively priced. This company shows up in the Buffett Foundation holdings. Soup is good food and so is the stock at the right price.
Price bought: Stock became attractively priced during recessions, panic sell-offs, a warm winter (all these hurt soup sales) or business screwup.
Capital Cities Communications: This acquired ABC, when was then acquired by Disney: Buffett loves owning television stations because they make a lot of money and are cheap to run - you buy a transmitter, put up an antenna, plug it into the wall, and you're in business. Network affiliated TV stations make money because they are key advertising bridges that businesses have to use to reach potential consumers. Capital Cities owned a bunch of television stations and cable TV networks and was incredibly well run. Buffett owned the company in the late seventies and then sold it in the early eighties, which he admitted was a mistake.
Price bought: in late 70s
Price sold: in early 80s (Buffett admitted selling this was a mistake)
When it acquired ABC, back in 1986, it needed an equity infusion, so the CEO asked Buffett whether he wanted in. Buffett made an offer and the company said yes. He bought $515 million worth, paying $17.25 a share and then sold out (in a cash-and-stock deal) when Disney acquired Capital Cities in 1995 for $127 a share. That equates to a 24% compounded annual return on his 1986 investment. Another lesson in the long-term-hold department.
Price bought: $17.25 a share (1986, Capital Cities required equity infusion)
Price sold: $127 a share (1995, acquired by Disney)
Cleveland-Cliffs Iron Company: This is the largest supplier of iron ore products to North American steel companies. It owns and operates 5 iron ore mines with several large steelmakers. The company has been around since 1840. What makes it interesting is that during a recession in the steel business it simply closes down the mines until demand returns. Buffett first bought shares in this company during the 1984 steel industry recession and sold it after the industry recovered.
Price bought: Acquired in 1984 during the steel industry recession
Price sold: When steel industry recovered after the 1984 steel industry recession.
The most recent buying opportunity with this company occurred in 2001 when an overabundance of iron ore met a recession in the steel industry, which killed iron ore prices and sent the stock tumbling from a high of $50 to a low of $14. The company's durable competitive advantage is that it is tied in with the steel companies and can stop production and cut expenses without damaging its competitive advantage. You buy this one in a recession and sell when it's over.
Price bought: $14 Buy during a recession. ( Down from $50 due to recession in the steel industry)
Price sold: Sell when when steel recession is over.
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Bristol-Myers Squibb: This company sold about $22 billion in proprietary medical products, ethical pharmaceuticals and health and beauty products in 2000. It has been in business since 1887, and unless people are going to stop getting sick, it is going to be in business for a long time to come. We believe Buffett was buying it in 1993, on the threat of government regulation, for around $13 a share, with earnings of $1.10 a share and historical returns on equity and capital of over 30%. So far Buffett has earned a 23% average annual return on this investment.
Price bought: $13 a share (in 1993, on threat of government regulation)
Earnings: $1.10 a share
Historical ROE and ROTC: >30%
Campbell Soup: Campbell's has 70% of the condensed-soup market. It also owns Franco-American, V8, Swanson, Pepperidge Farm, Vlasic, Mrs. Paul's, Prego, and dozens of other brand names that you might find in your grocery basket. The durability of this company's competitive advantage is amazing. Winter comes along and people start buying soups. Look for recessions, panic sell-offs, a warm winter, which can hurt soup sales, or just a business screwup to make the stock attractively priced. This company shows up in the Buffett Foundation holdings. Soup is good food and so is the stock at the right price.
Price bought: Stock became attractively priced during recessions, panic sell-offs, a warm winter (all these hurt soup sales) or business screwup.
Capital Cities Communications: This acquired ABC, when was then acquired by Disney: Buffett loves owning television stations because they make a lot of money and are cheap to run - you buy a transmitter, put up an antenna, plug it into the wall, and you're in business. Network affiliated TV stations make money because they are key advertising bridges that businesses have to use to reach potential consumers. Capital Cities owned a bunch of television stations and cable TV networks and was incredibly well run. Buffett owned the company in the late seventies and then sold it in the early eighties, which he admitted was a mistake.
Price bought: in late 70s
Price sold: in early 80s (Buffett admitted selling this was a mistake)
When it acquired ABC, back in 1986, it needed an equity infusion, so the CEO asked Buffett whether he wanted in. Buffett made an offer and the company said yes. He bought $515 million worth, paying $17.25 a share and then sold out (in a cash-and-stock deal) when Disney acquired Capital Cities in 1995 for $127 a share. That equates to a 24% compounded annual return on his 1986 investment. Another lesson in the long-term-hold department.
Price bought: $17.25 a share (1986, Capital Cities required equity infusion)
Price sold: $127 a share (1995, acquired by Disney)
Cleveland-Cliffs Iron Company: This is the largest supplier of iron ore products to North American steel companies. It owns and operates 5 iron ore mines with several large steelmakers. The company has been around since 1840. What makes it interesting is that during a recession in the steel business it simply closes down the mines until demand returns. Buffett first bought shares in this company during the 1984 steel industry recession and sold it after the industry recovered.
Price bought: Acquired in 1984 during the steel industry recession
Price sold: When steel industry recovered after the 1984 steel industry recession.
The most recent buying opportunity with this company occurred in 2001 when an overabundance of iron ore met a recession in the steel industry, which killed iron ore prices and sent the stock tumbling from a high of $50 to a low of $14. The company's durable competitive advantage is that it is tied in with the steel companies and can stop production and cut expenses without damaging its competitive advantage. You buy this one in a recession and sell when it's over.
Price bought: $14 Buy during a recession. ( Down from $50 due to recession in the steel industry)
Price sold: Sell when when steel recession is over.
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 1)
These are companies Warren Buffett invested either personally, through his foundation, or through Berkshire Hathaway. Be aware that simply because Warren Buffett has made investments in these companies or they met his selective criteria doesn't mean he would buy them today. He bought when the price was right. Remember: You want to identify the company with a durable competitive advantage and then let the price of its shares determine when you pull the trigger. The right price may come tomorrow or it may come five years from now.
Also keep in mind that at times Mr. Market is wildly enthusiastic about some of these businesses and prices them high. On other days he will be very pessimistic about their prospects and price them low. You are interested in the days that Mr. Market is pessismistic, not the others.
Amerada Hess: This is an oil company. Buffett made this investment based on asset evaluation. He multiplied the price of oil by the number of barrels it had in the ground and found that it was selling at a significant discount. He paid $26 a share and we believe he sold it a year later at approximately $50 a share. Not too shabby.
Price paid: $26 a share (Price selling at a significant discount based on asset evaluation.)
Price sold: $50 a share (Sold a year later)
American Broadcasting Companies: ABC is a television network that in the early seventies had one of the most durable competitive advantages around. We believe Buffett started buying it during an advertising recession in 1978 for approximately $24 a share and sold it in 1980 for approximately $40 a share. After it merged with Capital Cities in 1984, it merged with Disney.
Price paid: $24 a share in 1978 (during an advertising recession)
Price sold: $40 a share in 1980
American Express: This is a major financial services company that just about does it all. But its strength is travel-industry-related services for businesses, and at this, it's king. Its credit card business is a kind of toll bridge that makes money every time someone uses an American Express card. Buffett first invested in the company in the sixties during the salad-oil scandal that destroyed its equity base but not its core business. Buffett sold out after the company recovered.
Price bought: In 1960s during the salad-oil scandal when its equity base destroyed.
Price sold: After the company recovered.
In the early nineties AmEx started to have problems. From September 1991 to September 1994 the company lost approximately 2.2 million individual card users and saw its share of the total credit card market drop from 22.5% in 1990 to 16.3% in 1995. This was caused in part by AmEx's push to become a one-stop shop for all your financial needs. In diversifying into different financial products, it lost focus on its credit card operations - the bread and butter of its business. Keep in mind that businesses with a durable competitive advantage are sometimes managed by teams that ignore the wonderful underlying parts of the business that made the company great in the first place. In AmEx's case, Harvey Golub rode to the rescue as the company's new CEO. Buffett jumped on Golub's wagon and began buying the stock. Remember, you invest not only in the company, but also in the people who run it. Buffett made his 1994 purchase right before the spin-off of Lehman Brothers (an investment bank). AmEx gave its shareholders one-fifth of a share in Lehman for every share of AmEx they owned. The one-fifth Lehman was worth approximately $4. Buffett paid $26 a share for the AmEx and then got $4 a share in Lehman stock via the spin-off. Today his AmEx stock is worth approximately $166 a share, which equates to a 30% compounded annual rate of return. When it comes to the American Express card, Warren is happy that people don't leave home without it.
Price bought: $26 a share (In 1994, when AmEx was having problems.)
Price subsequently: $166 a share (30% compounded annual rate of return)
Anheuser-Busch: This is the world's largest brewing company. It has what Buffett calls a durable competitive advantage: You order your beer by brand name, and brand names it has aplenty: Budweiser, Bud Light, Busch, Michelob, Red Wolf lager, ZiegenBock Amber, and O'Doul's. It gets great returns on equity and total capital and has strong earnings growth. You need a recession or panic sell-off to get a buying opportunity on this one. Anheuser-Busch is a Buffett Foundation holding.
Price bought: You need a recession or panic sell-off to get a buying opportunity on this one.
Great ROE, ROTC and strong earnings growth.
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
These are companies Warren Buffett invested either personally, through his foundation, or through Berkshire Hathaway. Be aware that simply because Warren Buffett has made investments in these companies or they met his selective criteria doesn't mean he would buy them today. He bought when the price was right. Remember: You want to identify the company with a durable competitive advantage and then let the price of its shares determine when you pull the trigger. The right price may come tomorrow or it may come five years from now.
Also keep in mind that at times Mr. Market is wildly enthusiastic about some of these businesses and prices them high. On other days he will be very pessimistic about their prospects and price them low. You are interested in the days that Mr. Market is pessismistic, not the others.
Amerada Hess: This is an oil company. Buffett made this investment based on asset evaluation. He multiplied the price of oil by the number of barrels it had in the ground and found that it was selling at a significant discount. He paid $26 a share and we believe he sold it a year later at approximately $50 a share. Not too shabby.
Price paid: $26 a share (Price selling at a significant discount based on asset evaluation.)
Price sold: $50 a share (Sold a year later)
American Broadcasting Companies: ABC is a television network that in the early seventies had one of the most durable competitive advantages around. We believe Buffett started buying it during an advertising recession in 1978 for approximately $24 a share and sold it in 1980 for approximately $40 a share. After it merged with Capital Cities in 1984, it merged with Disney.
Price paid: $24 a share in 1978 (during an advertising recession)
Price sold: $40 a share in 1980
American Express: This is a major financial services company that just about does it all. But its strength is travel-industry-related services for businesses, and at this, it's king. Its credit card business is a kind of toll bridge that makes money every time someone uses an American Express card. Buffett first invested in the company in the sixties during the salad-oil scandal that destroyed its equity base but not its core business. Buffett sold out after the company recovered.
Price bought: In 1960s during the salad-oil scandal when its equity base destroyed.
Price sold: After the company recovered.
In the early nineties AmEx started to have problems. From September 1991 to September 1994 the company lost approximately 2.2 million individual card users and saw its share of the total credit card market drop from 22.5% in 1990 to 16.3% in 1995. This was caused in part by AmEx's push to become a one-stop shop for all your financial needs. In diversifying into different financial products, it lost focus on its credit card operations - the bread and butter of its business. Keep in mind that businesses with a durable competitive advantage are sometimes managed by teams that ignore the wonderful underlying parts of the business that made the company great in the first place. In AmEx's case, Harvey Golub rode to the rescue as the company's new CEO. Buffett jumped on Golub's wagon and began buying the stock. Remember, you invest not only in the company, but also in the people who run it. Buffett made his 1994 purchase right before the spin-off of Lehman Brothers (an investment bank). AmEx gave its shareholders one-fifth of a share in Lehman for every share of AmEx they owned. The one-fifth Lehman was worth approximately $4. Buffett paid $26 a share for the AmEx and then got $4 a share in Lehman stock via the spin-off. Today his AmEx stock is worth approximately $166 a share, which equates to a 30% compounded annual rate of return. When it comes to the American Express card, Warren is happy that people don't leave home without it.
Price bought: $26 a share (In 1994, when AmEx was having problems.)
Price subsequently: $166 a share (30% compounded annual rate of return)
Anheuser-Busch: This is the world's largest brewing company. It has what Buffett calls a durable competitive advantage: You order your beer by brand name, and brand names it has aplenty: Budweiser, Bud Light, Busch, Michelob, Red Wolf lager, ZiegenBock Amber, and O'Doul's. It gets great returns on equity and total capital and has strong earnings growth. You need a recession or panic sell-off to get a buying opportunity on this one. Anheuser-Busch is a Buffett Foundation holding.
Price bought: You need a recession or panic sell-off to get a buying opportunity on this one.
Great ROE, ROTC and strong earnings growth.
Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Mueller Industries: This is a Berkshire holding. Buffett is believed to have started buying Mueller Industries, the leading low-cost producer of copper plumbing fittings, tubes, and related products, during the October 2000 sell-off that knocked Mueller down from $32 a share to $21 against solid earnings of $2.16 a share. The company has been in business since 1917 (talk about durable) and has a low-cost infrastructure that allows it to stomp the competition. As of May 2001, Mueller is trading at $34 a share, giving Buffett a superfast 62% return on Berkshire's money. Buffett loves those fall sell-offs.
Price paid: $21 a share (Down from $32)
Earnings: $2.16 a share
Initial return: 10.3%
Per share earnings annual growth rate: -
Nike: Nike is the world's number one shoe company and has more than 40% of the U.S. sports shoe market. This shows up in Berkshire's portfolio, but we don't have any hard information on Buffett's purchase price. We believe he was buying Nike in 1998 and 2000 when it trading below $30 a share. Buying opportunities include a recession in the shoe business, a general recession, and a correction or panic sell-off.
Price paid: <$30 a share Earnings: - a share Initial return: - % Per share earnings annual growth rate: - % USG Corp: USG is the low-cost producer of wallboard and the number one maker of gypsum wallboard in the world. This is a classic bad-news play. As we write, the price of wallboard is falling and the company is facing asbestos litigation, which has dropped the stock's price from $45 a share to $10. Buffett is buying like crazy. So far he has acquired a 15% stake in the company. In June 2001, the company filed for bankruptcy, but many analysts thought this filing would actually help stabilize current operations. The verdict is still out on this one.
Price paid: $10 a share (Down from $45)
Earnings: $ - a share
Initial return: - %
Per share earnings annual growth rate: - %
Yum Brands: This owns three major fast-food brand names: KFC, Pizza Hut, Taco Bell. This is a Berkshire holding. We believe Berkshire begain its purchases in 2000 after the market crash at approximately $24 a share against earnings of $3.65 a share, which equates to an initial return of 15%. As of March 2002, the stock traded at $55 a share.
Price paid: $24 a share
Earnings: $3.65 a share
Initial return: 15 %
Per share earnings annual growth rate: - %
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Mueller Industries: This is a Berkshire holding. Buffett is believed to have started buying Mueller Industries, the leading low-cost producer of copper plumbing fittings, tubes, and related products, during the October 2000 sell-off that knocked Mueller down from $32 a share to $21 against solid earnings of $2.16 a share. The company has been in business since 1917 (talk about durable) and has a low-cost infrastructure that allows it to stomp the competition. As of May 2001, Mueller is trading at $34 a share, giving Buffett a superfast 62% return on Berkshire's money. Buffett loves those fall sell-offs.
Price paid: $21 a share (Down from $32)
Earnings: $2.16 a share
Initial return: 10.3%
Per share earnings annual growth rate: -
Nike: Nike is the world's number one shoe company and has more than 40% of the U.S. sports shoe market. This shows up in Berkshire's portfolio, but we don't have any hard information on Buffett's purchase price. We believe he was buying Nike in 1998 and 2000 when it trading below $30 a share. Buying opportunities include a recession in the shoe business, a general recession, and a correction or panic sell-off.
Price paid: <$30 a share Earnings: - a share Initial return: - % Per share earnings annual growth rate: - % USG Corp: USG is the low-cost producer of wallboard and the number one maker of gypsum wallboard in the world. This is a classic bad-news play. As we write, the price of wallboard is falling and the company is facing asbestos litigation, which has dropped the stock's price from $45 a share to $10. Buffett is buying like crazy. So far he has acquired a 15% stake in the company. In June 2001, the company filed for bankruptcy, but many analysts thought this filing would actually help stabilize current operations. The verdict is still out on this one.
Price paid: $10 a share (Down from $45)
Earnings: $ - a share
Initial return: - %
Per share earnings annual growth rate: - %
Yum Brands: This owns three major fast-food brand names: KFC, Pizza Hut, Taco Bell. This is a Berkshire holding. We believe Berkshire begain its purchases in 2000 after the market crash at approximately $24 a share against earnings of $3.65 a share, which equates to an initial return of 15%. As of March 2002, the stock traded at $55 a share.
Price paid: $24 a share
Earnings: $3.65 a share
Initial return: 15 %
Per share earnings annual growth rate: - %
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Johns Manville: This was a great company in great financial shape until it sold a ton of products loaded with asbestos that made people deathly ill. These people sued Johns Manville by the tens of thousands, pushing it into bankruptcy. The bankruptcy court put 78% of the ownership of the company into a trust in settlement of the lawsuits. Even though the company was making a great deal of money selling nonasbestos products and the stock was publicly traded, investors weren't very interested. Tech stocks were the ticket of the day, not stodgy old insulation companies.
In 2000, Berkshire purchased Johns Manville, the nations's largest manufacturer of insulation products, commercial and industrial roofing, filtration systems, and fiber mats. It paid $1.8 billion for the entire company against pretax earnings of $343.75 million. That equates to a 19% initial pretax return on Berkshire's money. From 1990 to 2000, John Manville grew its per share earnings at an annual rate of 9.5%, which is better than inflation. Buffett could argue that Berkshire bought a bond with an initial pretax return of 19% that would grow at an annual rate of 9.5%.
Price paid: $1.8 billion for entire company
Earnings: $343.75 (pre-tax earnings)
Initial return: 19%
Per share earnings annual growth rate: 9.5%
Justin Industries: Justin Industries makes Acme Bricks and brand-name western boots like Tony Lama. Buffett bought the entire company for $570 million against pretax earnings of approximately $51 million, which equates to a pretax return of approximately 8.9%. Earnings have been growing at 16% a year for the last 10 years. Buffett could argue that he just bought a bond that paid a pretax return of 8.9% that would increase at 16% a year. It beats the static 6% pretax return that treasuries were paying.
Price paid: $570 million for entire company
Earnings: $51 million (pretax earning)
Initial return: 8.9%
Per share earnings annual growth rate: 16%
La-Z-Boy Inc: La-Z-Boy is the number one manufacturer of upholstered furniture in the United States and the number one seller of recliners in the world. This is a Berkshire holding. We believe Buffett started buying La-Z-Boy after the market crashed in February 2000 for $14 a share, on earnings of $1.46 a share. As of June, 2001, it trades at $19 a share. It has been growing per share earnings at 15.7% a year. Expect Buffett to continue buying if he can get it cheap.
Price paid: $14 a share
Earnings: $1.46 a share
Initial return: 10.4%
Per share earnings annual growth rate: 15.7%
Liz Claiborne: This is America's number one seller of clothes and accessories for the career woman. Its clothes are sold in department stores and in its 275 retail outlets. It also makes Donna Karan jeans and Lucky Brand dungarees. It's been in business for more than 20 years. The durable competitive advantage is its brand name, which it stitches to clothing made cheaply in another part of the world.
In 1998, as momentum investors fled low-tech businesses for high-tech businesses, Liz Claiborne saw its stock tumble from a high of $53 a share to a low of $27. Buffett stepped into the market, buying nearly 9% of the company. In 1998, Liz Claiborne earned $2.57 a share against an asking price of $27, which equates to an initial return of 9.5%. By 2000 it was earning $3.43 a share, which equates to a 12.7% return on his initial investment. The longer you stay, the better it gets.
Price paid: $27 a share (Down from high of $53)
Earnings: $2.57 a share
Initial return: 9.5%
Per share earnings annual growth rate: 12.7%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Johns Manville: This was a great company in great financial shape until it sold a ton of products loaded with asbestos that made people deathly ill. These people sued Johns Manville by the tens of thousands, pushing it into bankruptcy. The bankruptcy court put 78% of the ownership of the company into a trust in settlement of the lawsuits. Even though the company was making a great deal of money selling nonasbestos products and the stock was publicly traded, investors weren't very interested. Tech stocks were the ticket of the day, not stodgy old insulation companies.
In 2000, Berkshire purchased Johns Manville, the nations's largest manufacturer of insulation products, commercial and industrial roofing, filtration systems, and fiber mats. It paid $1.8 billion for the entire company against pretax earnings of $343.75 million. That equates to a 19% initial pretax return on Berkshire's money. From 1990 to 2000, John Manville grew its per share earnings at an annual rate of 9.5%, which is better than inflation. Buffett could argue that Berkshire bought a bond with an initial pretax return of 19% that would grow at an annual rate of 9.5%.
Price paid: $1.8 billion for entire company
Earnings: $343.75 (pre-tax earnings)
Initial return: 19%
Per share earnings annual growth rate: 9.5%
Justin Industries: Justin Industries makes Acme Bricks and brand-name western boots like Tony Lama. Buffett bought the entire company for $570 million against pretax earnings of approximately $51 million, which equates to a pretax return of approximately 8.9%. Earnings have been growing at 16% a year for the last 10 years. Buffett could argue that he just bought a bond that paid a pretax return of 8.9% that would increase at 16% a year. It beats the static 6% pretax return that treasuries were paying.
Price paid: $570 million for entire company
Earnings: $51 million (pretax earning)
Initial return: 8.9%
Per share earnings annual growth rate: 16%
La-Z-Boy Inc: La-Z-Boy is the number one manufacturer of upholstered furniture in the United States and the number one seller of recliners in the world. This is a Berkshire holding. We believe Buffett started buying La-Z-Boy after the market crashed in February 2000 for $14 a share, on earnings of $1.46 a share. As of June, 2001, it trades at $19 a share. It has been growing per share earnings at 15.7% a year. Expect Buffett to continue buying if he can get it cheap.
Price paid: $14 a share
Earnings: $1.46 a share
Initial return: 10.4%
Per share earnings annual growth rate: 15.7%
Liz Claiborne: This is America's number one seller of clothes and accessories for the career woman. Its clothes are sold in department stores and in its 275 retail outlets. It also makes Donna Karan jeans and Lucky Brand dungarees. It's been in business for more than 20 years. The durable competitive advantage is its brand name, which it stitches to clothing made cheaply in another part of the world.
In 1998, as momentum investors fled low-tech businesses for high-tech businesses, Liz Claiborne saw its stock tumble from a high of $53 a share to a low of $27. Buffett stepped into the market, buying nearly 9% of the company. In 1998, Liz Claiborne earned $2.57 a share against an asking price of $27, which equates to an initial return of 9.5%. By 2000 it was earning $3.43 a share, which equates to a 12.7% return on his initial investment. The longer you stay, the better it gets.
Price paid: $27 a share (Down from high of $53)
Earnings: $2.57 a share
Initial return: 9.5%
Per share earnings annual growth rate: 12.7%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
GPU Inc: This is a utility holding company that distributes electricity to 2 million people in New Jersey and Pennsylvania. It was serves 1.4 million customers in Australia. This is a Berkshire holding.
We believe Buffett started buying this stock in February of 2000, for around $25 a share, against a book value of $28.46 a share, dividend payout of $2.18, and 1999 per share earnings of $3.25 a share. Buffett's buying opportunity came when the cost of creating energy increased to more than GPU could charge its customers, which caused it to lose $1.74 a share in the second quarter of 2000. To increase rates, the company has to apply to Pennsylavania regulators. If the regulators don't increase rates, GPU will go out of business and the good people of Pennsylvania will go without power. As of May 2001, First Energy, another utility holding company, had made a bid of $36 a share for the company, and the wise regulators of Pennsylvania are considering giving GPU a huge rate increase.
Price paid: $25 a share
Dividend: $2.18 a share
Earnings: $3.25 a share
Book value: $28.46 a share
H&R Block: This company prepares income tax returns. It is currently expanding its financial services group.
HRPT Properties Trust: This is a REIT that focuses on commercial real estate. Its earnings are solid and it pays a dividend every year between $0.88 and $1.51 a share. It is presently repurchasing its shares. We believe Buffett has been buying this stock at a price rumored to be $7 to $8 a share, where it traded for much of 2000. At that price he is getting an initial return of between 12.5% and 20%. We might add that at that price it was considerably below its book value of $11.60 a share - a Grahamian value play? As of May 2001 you could still buy it at $8.90 a share.
Price paid: $7 to $8 a share
Dividend: $0.88 to $1.51 a share
Book value: $11.60 a share
Initial return: 12.5% to 20%
JDN Realty: This is a REIT that develops, acquires, leases, and manages shopping centres in 18 states. It has a book value of $14.80 a share and pays a dividend of $1.20 a share. We believe Buffett started buying its stock at around $9 a share. The book value represents real estate that has been depreciated and is worth far more than it is carried on JDN's books. Buffett bought the stock at an initial return of 13% ($1.20 / $9 = 13%) and as an asset play.
Price paid: $9 a share
Dividend: $1.20 a share
Book value: $14.80 a share
Initial return: 13%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
GPU Inc: This is a utility holding company that distributes electricity to 2 million people in New Jersey and Pennsylvania. It was serves 1.4 million customers in Australia. This is a Berkshire holding.
We believe Buffett started buying this stock in February of 2000, for around $25 a share, against a book value of $28.46 a share, dividend payout of $2.18, and 1999 per share earnings of $3.25 a share. Buffett's buying opportunity came when the cost of creating energy increased to more than GPU could charge its customers, which caused it to lose $1.74 a share in the second quarter of 2000. To increase rates, the company has to apply to Pennsylavania regulators. If the regulators don't increase rates, GPU will go out of business and the good people of Pennsylvania will go without power. As of May 2001, First Energy, another utility holding company, had made a bid of $36 a share for the company, and the wise regulators of Pennsylvania are considering giving GPU a huge rate increase.
Price paid: $25 a share
Dividend: $2.18 a share
Earnings: $3.25 a share
Book value: $28.46 a share
H&R Block: This company prepares income tax returns. It is currently expanding its financial services group.
HRPT Properties Trust: This is a REIT that focuses on commercial real estate. Its earnings are solid and it pays a dividend every year between $0.88 and $1.51 a share. It is presently repurchasing its shares. We believe Buffett has been buying this stock at a price rumored to be $7 to $8 a share, where it traded for much of 2000. At that price he is getting an initial return of between 12.5% and 20%. We might add that at that price it was considerably below its book value of $11.60 a share - a Grahamian value play? As of May 2001 you could still buy it at $8.90 a share.
Price paid: $7 to $8 a share
Dividend: $0.88 to $1.51 a share
Book value: $11.60 a share
Initial return: 12.5% to 20%
JDN Realty: This is a REIT that develops, acquires, leases, and manages shopping centres in 18 states. It has a book value of $14.80 a share and pays a dividend of $1.20 a share. We believe Buffett started buying its stock at around $9 a share. The book value represents real estate that has been depreciated and is worth far more than it is carried on JDN's books. Buffett bought the stock at an initial return of 13% ($1.20 / $9 = 13%) and as an asset play.
Price paid: $9 a share
Dividend: $1.20 a share
Book value: $14.80 a share
Initial return: 13%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Aegis Realty: This is a real estate investment trust (REIT) that owns and manages three million square feet of shopping-center space. We believe Buffett was buying it in 2000 for around $8 to $9 a share. It pays a dividend of $0.96 a share and has a book value of $14.81 a share. This is an interest play that pays a 10% return and a Grahamian value play that's selling below book value.
Price paid: $8 to $9 a share
Dividend: $0.96 a share
Book value: $14.81 a share
Initial return: 10%
Dun & Bradstreet Corp: This sells business information about other businesses.. Buffett bought this in 1998 because it is a great company and it was about to spin off its lucrative Moody's Investors Services. In spin-offs, the market sometimes fails to fully appreciate the value of the whole divided into separate parts. This is a Berkshire holding, believed to have been purchased in 1999 before the spin-off for approximately $15 a share. As of May 2001, it trades at $27 a share. Moody's Investors Services was spun off on September 30, 2000, at $26 a share, and as of May 2001 it trades at $32 a share. On Buffett's original $15 investment in D&B he made $12 on the D&B side and $32 on the Moody's side for a total profit of $44, which equates to a 293% return on his original investment of $15. Where was the rest of Wall Street? Off chasing tech stocks, of course.
Price paid: $15 a share
First Data Corp: This company process those millions of credit card transactions. It's a fantastic business with which Buffett has long been fascinated. This is a Berkshire holding.
Buffett started buying it in 1998 during a fall contraction/panic sell-off that dropped its price down to $20 a share against earnings of $1.56 a share, which equates to an initial return of 7.8%. It's per share earnings had a 15% annual rate of growth. In May 2001 its stock was trading at $66 a share, which equates to a 48% compounding annual rate of return.
Price paid: $20 a share
Earnings: $1.56 a share
Initial return: 7.8%
Per share earnings annual growth rate: 15%
Furniture Brands International: Buffet probably saw this one in Value Line, did his scuttlebutt at the Nebraska Furniture Mart, and discovered that Furniture Brands International was the number one manufacturer of residential furniture in America. This is a Berkshire holding.
We believe that he started buying it in 2000 for around $14 a share against earnings of $1.92 a share, which equates to an initial return of 13.7%. Its per share earnings have been growing at an annual rate of 28%. This is a great business. Everyone buys furniture at some time or another, and FBI is there to sell it to them. It has been in business since 1921 and has strong earnings and great returns on equity and total capital. Over the years it has come to dominate its field. Buffett bought after the 1999 bubble burst. It didn't stay down long. By February 2001 it was trading at $25 a share, giving Buffett a quick 79% return on his money.
Price paid: $14 a share
Earnings: $1.92 a share
Initial return: 13.7%
Per share earnings annual growth rate: 28%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Aegis Realty: This is a real estate investment trust (REIT) that owns and manages three million square feet of shopping-center space. We believe Buffett was buying it in 2000 for around $8 to $9 a share. It pays a dividend of $0.96 a share and has a book value of $14.81 a share. This is an interest play that pays a 10% return and a Grahamian value play that's selling below book value.
Price paid: $8 to $9 a share
Dividend: $0.96 a share
Book value: $14.81 a share
Initial return: 10%
Dun & Bradstreet Corp: This sells business information about other businesses.. Buffett bought this in 1998 because it is a great company and it was about to spin off its lucrative Moody's Investors Services. In spin-offs, the market sometimes fails to fully appreciate the value of the whole divided into separate parts. This is a Berkshire holding, believed to have been purchased in 1999 before the spin-off for approximately $15 a share. As of May 2001, it trades at $27 a share. Moody's Investors Services was spun off on September 30, 2000, at $26 a share, and as of May 2001 it trades at $32 a share. On Buffett's original $15 investment in D&B he made $12 on the D&B side and $32 on the Moody's side for a total profit of $44, which equates to a 293% return on his original investment of $15. Where was the rest of Wall Street? Off chasing tech stocks, of course.
Price paid: $15 a share
First Data Corp: This company process those millions of credit card transactions. It's a fantastic business with which Buffett has long been fascinated. This is a Berkshire holding.
Buffett started buying it in 1998 during a fall contraction/panic sell-off that dropped its price down to $20 a share against earnings of $1.56 a share, which equates to an initial return of 7.8%. It's per share earnings had a 15% annual rate of growth. In May 2001 its stock was trading at $66 a share, which equates to a 48% compounding annual rate of return.
Price paid: $20 a share
Earnings: $1.56 a share
Initial return: 7.8%
Per share earnings annual growth rate: 15%
Furniture Brands International: Buffet probably saw this one in Value Line, did his scuttlebutt at the Nebraska Furniture Mart, and discovered that Furniture Brands International was the number one manufacturer of residential furniture in America. This is a Berkshire holding.
We believe that he started buying it in 2000 for around $14 a share against earnings of $1.92 a share, which equates to an initial return of 13.7%. Its per share earnings have been growing at an annual rate of 28%. This is a great business. Everyone buys furniture at some time or another, and FBI is there to sell it to them. It has been in business since 1921 and has strong earnings and great returns on equity and total capital. Over the years it has come to dominate its field. Buffett bought after the 1999 bubble burst. It didn't stay down long. By February 2001 it was trading at $25 a share, giving Buffett a quick 79% return on his money.
Price paid: $14 a share
Earnings: $1.92 a share
Initial return: 13.7%
Per share earnings annual growth rate: 28%
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
These are companies Warren Buffett invested either personally, through his foundation, or through Berkshire Hathaway. Be aware that simply because Warren Buffett has made investments in these companies or they met his selective criteria doesn't mean he would buy them today. He bought when the price was right. Remember: You want to identify the company with a durable competitive advantage and then let the price of its shares determine when you pull the trigger. The right price may come tomorrow or it may come five years from now.
Also keep in mind that at times Mr. Market is wildly enthusiastic about some of these businesses and prices them high. On other days he will be very pessimistic about their prospects and price them low. You are interested in the days that Mr. Market is pessismistic, not the others.
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
These are companies Warren Buffett invested either personally, through his foundation, or through Berkshire Hathaway. Be aware that simply because Warren Buffett has made investments in these companies or they met his selective criteria doesn't mean he would buy them today. He bought when the price was right. Remember: You want to identify the company with a durable competitive advantage and then let the price of its shares determine when you pull the trigger. The right price may come tomorrow or it may come five years from now.
Also keep in mind that at times Mr. Market is wildly enthusiastic about some of these businesses and prices them high. On other days he will be very pessimistic about their prospects and price them low. You are interested in the days that Mr. Market is pessismistic, not the others.
Related articles:
Companies Warren Buffett invested between 1998 and 2001 (Part 1)
Companies Warren Buffett invested between 1998 and 2001 (Part 2)
Companies Warren Buffett invested between 1998 and 2001 (Part 3)
Companies Warren Buffett invested between 1998 and 2001 (Part 4)
Companies Warren Buffett invested between 1998 and 2001 (Part 5)
Friday 5 June 2009
Return on Shareholders' Equity
Return on Shareholders' Equity
This measures profitability, specifically the percentage return that was delivered to a company's owners.
Why it is important
ROE is a fundamental indication of a company's ability to increase its earnings per share and thus the quality of its stocks, because it reveals how well a company is using its money to generate additional earnings.
- It is a relatively straightforward benchmark, easy to calculate, and is applicable to a majority of industries.
- ROE allows investors to compare a company's use of their equity with other investments, and to compare the performance of companies in the same industry.
- ROE can also help to evaluate trends in a business.
Businesses that generate high returns on equity are businesses that pay off their shareholders handsomely and create substantial assets for each dollar invested.
How it works in practice
To calculate ROE, divide the net income shown on the income statement (usually of the past year) by shareholders' equity, which appears on the balance sheet:
ROE
= net income/owner's equity
TRICKS OF THE TRADE
- Because new variations of the ROE ratio do appear, it is important to know how the figure is calculated.
- ROE for most companies certainly should be in double figures; investors often look for 15% or higher, while a return of 20% or more is considered excellent.
- Seasoned investors also review 5-year average ROE, to gauge consistency.
- A word of caution: financial statements usually report assets at book value, which is the purchase price minus depreciation; they do not show replacement costs. A business with older assets should show higher rates of ROE than a business with newer assets.
- Examining ROE with ROA (return on assets) can indicate if a company is debt-heavy. If a company owes very little debt, then it is reasonable to assume that its management is earning high profits and/or using assets effectively.
- A high ROE also could be due to leverage (a method of corporate fudning in which a higher proportion of funds is raised through borrowing than share issue). If liabilities are high the balance sheet will reveal it, hence the need to review it.
Return on Investment
Return on Investment (ROI)
This measures the overall profit or loss on an invesment expressed as a percentage of the total amount invested or total funds appearing on a company's balance sheet.
Why it is important
Like ROA or ROE, ROI measures a company's profitability and its management's ability to generate profits from the funds investors have placed at their disposal.
One opinion holds that if a company's operations cannot generate net earnings at a rate that exceeds the cost of borrowing funds from financial markets, the future of that company is grim.
How it works in practice
The most basic expressio of ROI is:
ROI = net profit / total investment
A more complex variatio of ROI is an equation known as the Du Pont formula:
ROI (Du Pont formula )
= (net profit after taxes/total assets)
= (net profit after taxes/sales) x (sales/total assets)
Champions of this formula, which was developed by the Du Pont Company in the 1920s, say that it helps to reveal how a company has both deployed its assets and controlled its costs, and how it can achieve the same percentage return in different ways.
For shareholders, the variation of the basic ROI formula used by investors is:
ROI
= [net income + (current value - original value) / original value ] x 100
For example, somebody invests $5,000 in a company and a year later has earned $100 in dividends, while the value of the shares is $5,200, the return on investment would be:
ROI
= [100 + (5,200 - 5,000) / 5,000 ] x 100
= [(100+200)/5,000] x 100
= 6%
TRICKS OF THE TRADE
This measures the overall profit or loss on an invesment expressed as a percentage of the total amount invested or total funds appearing on a company's balance sheet.
Why it is important
Like ROA or ROE, ROI measures a company's profitability and its management's ability to generate profits from the funds investors have placed at their disposal.
One opinion holds that if a company's operations cannot generate net earnings at a rate that exceeds the cost of borrowing funds from financial markets, the future of that company is grim.
How it works in practice
The most basic expressio of ROI is:
ROI = net profit / total investment
A more complex variatio of ROI is an equation known as the Du Pont formula:
ROI (Du Pont formula )
= (net profit after taxes/total assets)
= (net profit after taxes/sales) x (sales/total assets)
Champions of this formula, which was developed by the Du Pont Company in the 1920s, say that it helps to reveal how a company has both deployed its assets and controlled its costs, and how it can achieve the same percentage return in different ways.
For shareholders, the variation of the basic ROI formula used by investors is:
ROI
= [net income + (current value - original value) / original value ] x 100
For example, somebody invests $5,000 in a company and a year later has earned $100 in dividends, while the value of the shares is $5,200, the return on investment would be:
ROI
= [100 + (5,200 - 5,000) / 5,000 ] x 100
= [(100+200)/5,000] x 100
= 6%
TRICKS OF THE TRADE
- Securities investors can use yet another ROI formula: net income divided by shares and preference share equity plus long-term debt.
- It is vital to understand exactly what a ROI measures, for example assets, equity, or sales. Without this understanding, comparisons may be misleading or suspect. A search for "return on investment" on the web, for example, harvests everything from staff training to e-commerce to advertising and promotions!
- Be sure to establish whether the net profit figure used is before or after provision for taxes. This is important for making ROI comparisons accurate.
Return on Assets
This measures the company's profitability, expressed as a percentage of its total assets.
Why it is important
Return on assets (ROE) measures how effectively a company has used the total assets at its disposal to generate earnings. Because the ROA formula reflects total revenue, total cost, and assets deployed, the ratio itself reflects a management's ability to generate income during the course of a given period, usually a year.
The higher the return the better the profit performance. ROA is a convenient way of comparing a company's performance with that of its competitors, although the items on which the comparison is based may not always be identical.
ROA = net income / total asset
Variation of this formula
A variation of this formula can be used to calculate return on net asset (RONA)
RONA = net income/(fixed assets + working capital)
And, on occasion, the formula will separate after-tax interest expense from net income:
ROA = (net income + interest expense) / total assets
It is therefore important to understand what each components of the formula actually represents.
TRICKS OF THE TRADE
- Some experts recommend using the net income value at the end of the given period, and the assets value from beginning of the period or an average value taken over the complete period, rather than an end-of-the-period value; otherwise, the calculation will include assets that have accumulated during the year, which can be misleading.
- While a high ratio indicates a greater return, it must still be balanced against such factors as risk, sustainability, and reinvestment in the business through development costs. Some managements will sacrifice the long-term intersts of investors in order to achieve an impressive ROA in the short term.
- A climbing return on assets usually indicates a climbing stock price, because it tells investors that a management is skilled at generating profits from the resources that a business owns.
- Acceptable ROAs vary by sector. In banking, for example, a ROA of 1% or better is considered to be the standard benchmark of superior performance.
- ROA is an effective way of measuring the efficiency of manufacturers, but can be suspect when measuring service companies, or companies whose primary assets are people.
- Other variations of the ROA formula do exist.
Thursday 4 June 2009
Retained Earnings and the Market Value of the Company
Does the value added by Retained Earnings increase the Market Value of the Company?
Warren Buffett believes that if you can purchase a company with a durable competitive advantage at the right price, the retained earnings of the business will continuously increase the underlying value of the business and the market will continuously ratchet up the price of the company's stock. The key lies in the company's ability to properly allocate capital and keep adding to the company's net worth.
A perfect example, of this is his own Berkshire Hathaway, which in 1983 had a book value of $975 a share and was trading at around $1,000 a share. Eighteen years later, in 2001, it has a book value of approximately $40,000 a share and is tradinga t approximately $68,000. This means that Berkshire's book value has increased approximately 4,002% and the price of its shares by 6,874%. Warren grew the company's net worth by using the company's retained earnings to purchase whole or partial interests of other businesses with durable competitive advantages. As the net worth of the company grew, so did the market's valuation of the company, thus the rise in the price of the stock.
This is not true with the price-competitive business. It can retain earnings for years and still never show a real increase in the value of the company's stock. In 1983, General Motors had a book value of $32.44 a share and was trading at approximately $34. In 2001, General Motors' book value stood at approximately $36 a share and the price of its shares at around $55. All General Motors has to show for those eighteen years in business is a 10% increase in its book value and a 52% increase int he price of its stock.
All you have to do is review a company's historical increase or decrease in the price of its shares and the historical increase or decerease in the company's per share book value. Use at least a 10 year spread. A company with a durable competitive advantage will have an increasing share price and an increasing book value.
Remember, the ultimate goal is to buy on of these businesses at a time that it is suffering from some bad news situation that has caused the shortsighted stock market to send its stock price down. You are looking for a RECENT downturn in the price of a company's stock, not for a company whose stock price has done nothing over 10 years.
Warren Buffett believes that if you can purchase a company with a durable competitive advantage at the right price, the retained earnings of the business will continuously increase the underlying value of the business and the market will continuously ratchet up the price of the company's stock. The key lies in the company's ability to properly allocate capital and keep adding to the company's net worth.
A perfect example, of this is his own Berkshire Hathaway, which in 1983 had a book value of $975 a share and was trading at around $1,000 a share. Eighteen years later, in 2001, it has a book value of approximately $40,000 a share and is tradinga t approximately $68,000. This means that Berkshire's book value has increased approximately 4,002% and the price of its shares by 6,874%. Warren grew the company's net worth by using the company's retained earnings to purchase whole or partial interests of other businesses with durable competitive advantages. As the net worth of the company grew, so did the market's valuation of the company, thus the rise in the price of the stock.
This is not true with the price-competitive business. It can retain earnings for years and still never show a real increase in the value of the company's stock. In 1983, General Motors had a book value of $32.44 a share and was trading at approximately $34. In 2001, General Motors' book value stood at approximately $36 a share and the price of its shares at around $55. All General Motors has to show for those eighteen years in business is a 10% increase in its book value and a 52% increase int he price of its stock.
All you have to do is review a company's historical increase or decrease in the price of its shares and the historical increase or decerease in the company's per share book value. Use at least a 10 year spread. A company with a durable competitive advantage will have an increasing share price and an increasing book value.
Remember, the ultimate goal is to buy on of these businesses at a time that it is suffering from some bad news situation that has caused the shortsighted stock market to send its stock price down. You are looking for a RECENT downturn in the price of a company's stock, not for a company whose stock price has done nothing over 10 years.
RORC provides a fast method of determining durable-competitive-advantage business
Return on Retained Capital, RORC is not perfect.
Be careful that the per share earnings figures you employ for this test are not aberrations, but rather are indicative of the company's earning power.
The advantage to this test is that it gives you, the investor, a fast method of determining
Summary
Durable-competitive-advantage companies wield a one-two punch when it comes to allocating resources. They can better take advantage of retained earnings than price-competitive businesses, which over the long term will make their shareholders a lot richer than those who own stock in price-competitive businesses.
Price-competitive businesses are able to retain earnings, but because of the high costs of maintaining their businesses, they are unable to utilize them in a manner that will cause a significant increase in future earnings. This means that their stock prices end up doing little or nothing.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
Be careful that the per share earnings figures you employ for this test are not aberrations, but rather are indicative of the company's earning power.
The advantage to this test is that it gives you, the investor, a fast method of determining
- whether it is a durable-competitive-advantage business that lets its management utilize retained earnings to increase shareholders' riches or
- whether it's a price-competitive business that is stuck allocating its retained earnings to maintain its current business.
Summary
Durable-competitive-advantage companies wield a one-two punch when it comes to allocating resources. They can better take advantage of retained earnings than price-competitive businesses, which over the long term will make their shareholders a lot richer than those who own stock in price-competitive businesses.
Price-competitive businesses are able to retain earnings, but because of the high costs of maintaining their businesses, they are unable to utilize them in a manner that will cause a significant increase in future earnings. This means that their stock prices end up doing little or nothing.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
Companies that can't profitably deploy retained earnings make lousy investments
By calculating the Return of Retained Capital RORC (click here: Return on Retained Capital Illustrated by Various Companies ), you can tell that H&R Block and Wrigley do an infinitely better job of allocating retained earnings than General Motors or Bethlehem Steel does.
So which stocks would you rather have owned from 1990 to 2000? The price-competitive businesses General Motors and Bethlehem Steel, or the durable-competitive-advantage businesses Wrigley's and H&R Block? It's not a tough choice.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
- In fact, if you had invested $100,000 in General Motors stock in 1990 and sold it at its high in 2000, you would have had a net profit of $141,025, which equates to an annual compounding return of approximately 9.1%.
- If you had done the same with Bethlehem Steel, you would have had a loss of approximately $40,000.
- If you had invested $100,000 in Wrigley's in 1990 and sold out at its high in 2000, you would have had a net profit of $566,666, which equates to an annual compounding return of approximately 20%.
- With H&R Block you would have earned a net profit of $299,960, which equates to an annual compounding return of 14.8%.
So which stocks would you rather have owned from 1990 to 2000? The price-competitive businesses General Motors and Bethlehem Steel, or the durable-competitive-advantage businesses Wrigley's and H&R Block? It's not a tough choice.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
Resorts World Bhd
Business Summary
Resorts World Bhd engages in tourist resort business in Malaysia. It offers various leisure and hospitality services, which comprise gaming, hotel, entertainment, and amusement. The company's activities also include land and property development; time share ownership; renting of its apartment and part of its leasehold land; sale and letting of completed apartment units, and land and property; ownership and operation of aircrafts; the condotel, hotel, karaoke, leisure and entertainment, and show agent businesses; and golf resort and property development. In addition, it provides tours and travel related, training, property upkeep, cable car and electricity supply, offshore captive insurance, and water services. The company is based in Kuala Lumpur, Malaysia.
Resorts World Bhd engages in tourist resort business in Malaysia. It offers various leisure and hospitality services, which comprise gaming, hotel, entertainment, and amusement. The company's activities also include land and property development; time share ownership; renting of its apartment and part of its leasehold land; sale and letting of completed apartment units, and land and property; ownership and operation of aircrafts; the condotel, hotel, karaoke, leisure and entertainment, and show agent businesses; and golf resort and property development. In addition, it provides tours and travel related, training, property upkeep, cable car and electricity supply, offshore captive insurance, and water services. The company is based in Kuala Lumpur, Malaysia.
Fundamentals
* in millions
Company Basics
Exchange
Bursa Malaysia
Company Name
Resorts World Bhd
Stock Code
4715
Sectors
Consumer Discretionary
Paid Up Capital *
MYR 590.20
Par Value
- (as at 2008-12-31)
Market Cap *
MYR 16,643.50 (based on value of 2.8200 per share)
Performance (as at 2008-12-31) *
Total Assets:
MYR 9,422.90
Intangible Assets:
MYR 94.40
Revenue:
MYR 4,886.70
Earnings Before Interest and Taxes:
MYR 1,754.30
EPS (Basic) Inc. Extraordinary Items:
MYR 0.11
PE Inc. Extraordinary Items:
25.49
EPS (Basic) Exc. Extraordinary Items:
MYR 0.11
PE Exc. Extraordinary Items:
25.49
Net Income:
MYR 634.40 (2007: 1555m)
Dividends - Common/Ordinary:
MYR 299.45
Dividends - Total:
MYR 299.45
Goodwill:
-
Minority Interest:
MYR 7.30
Reserves:
-
Return On Assets:
6.73%
Return On Equity:
7.63% (2007: 18.97%)
Shareholder's Equity:
MYR 8,317.80
MYR 9,422.90
Intangible Assets:
MYR 94.40
Revenue:
MYR 4,886.70
Earnings Before Interest and Taxes:
MYR 1,754.30
EPS (Basic) Inc. Extraordinary Items:
MYR 0.11
PE Inc. Extraordinary Items:
25.49
EPS (Basic) Exc. Extraordinary Items:
MYR 0.11
PE Exc. Extraordinary Items:
25.49
Net Income:
MYR 634.40 (2007: 1555m)
Dividends - Common/Ordinary:
MYR 299.45
Dividends - Total:
MYR 299.45
Goodwill:
-
Minority Interest:
MYR 7.30
Reserves:
-
Return On Assets:
6.73%
Return On Equity:
7.63% (2007: 18.97%)
Shareholder's Equity:
MYR 8,317.80
----
Historical 5 Yr PE 12.1 to 18.4 (EY 8.26% to 5.44%)
Historical 10 Yr PE 12.6 to 22.9 (EY 7.94% to 4.37%)
Present PE based on MR2.82 = 25.49
Earnings Yield = 3.92%
DY = 1.8% (MYR 299.45/MYR 16,643.50 )
ROTC = 634.40/( OE 8691.09 + LTL 90.56 + STL 0) = 7.22% (2007: 18.90%)
Between the end of 1998 and the end of 2007:
- total earnings were $1.177 a share,
- total dividends were $0.283 a share and
- retained earnings were $0.894 per share ($1.177 - $0.283) to add to its equity base.
- the company's per share earnings increased from 8.9c a share to 19.2c, the difference was 10.3c a share.
- return on retained capital/earnings RORC was 10.3/89.4 = 11.52%
Return on Retained Capital Illustrated by Various Companies
Company A:
In 1989, earned $1.16 per share.
Between the end of 1989 and the end of 1999:
In 1989, earned $1.16 per share.
Between the end of 1989 and the end of 1999:
- total earnings were $17.14 a share,
- total dividends were $9.34 a share and
- retained earnings were $7.80 per share ($17.14 - $9.34 = $7.80) to add to its equity base.
- company's per share earnings increased from $1.16 to $2.56.
Interpretations:
- We can attribute the 1989 earnings of $1.16 per share to all the capital invested and retained in the company up to the end of 1989.
- We can also argue that the increase in earnings from $1.16 a share in 1989 to $2.56 a share in 2000 was due to the company's durable competitive advantage and management's doing an excellent job of investing the $7.80 a share in earnings that the company retained between 1989 and 1999.
- If we subtract the 1989 per share earnings of $1.16 from the 1999 per share earnings of $2.56, the difference is $1.40 a share.
- Thus, we can argue that the $7.80 a share retained between 1989 and 1999 produced $1.40 a share in additional income from 1999, for a total return of retained capital of 17.9% ($1.40 / $7.80 = 17.9%).
Company B
In 1990, earned $1 per share.
Between the end of 1990 and the end of 2000:
- total earnings were $20.12 a share,
- total dividends were $10.57 a share and
- retained earnings were $9.55 per share ($20.12 - $10.57 = $9.55) to add to its equity base.
- the company's per share earnings increased from $1 a share to $2.90.
Interpretations:
- We can attribute the 1990 earnings of $1 per share to all the capital invested and retained in the company up to the end of 1990.
- We can also argue that the increase in earnings from $1 a share in 1990 to $2.90 a share in 2000 was due to the company's durable competitive advantage and management's doing an excellent job of investing the $9.55 a share in earnings that the company retained between 1990 and 2000.
- If we subtract the 1990 per share earnings of $1 from the 2000 per share earnings of $2.90, the difference is $1.90 a share.
- Thus, we can argue that the $9.55 a share retained between 1990 and 2000 produced $1.90 a share in additional income from 1990, for a total return on retained capital of 19.9% ($1.90 / $9.55 = 19.9%).
Company C
In 1990, earned $42.96 per share.
Between the end of 1990 and the end of 2000:
- total earnings were $42.96 a share,
- total dividends were $10.30 a share and
- retained earnings were $32.66 per share ($42.96 - $10.30 = $32.66) to add to its equity base.
- the company's per share earnings increased from $6.33 a share to $8.50.
Interpretations:
- This company kept $32.66 per shae of shareholders' earnings and allocated it so that per share earnings increased by $2.17.
- This equates to a return on retained capital of 6.6% ($2.17 / $32.66 = 6.6%).
- This is about what you would have earned had you left it in the bank.
Company D
In 1990, earned $0.82 per share.
Between the end of 1990 and the end of 2000:
- total earnings were $4.93 a share,
- total dividends were $0.80 a share and
- retained earnings were $4.13 per share ($4.93 - $0.80 = $4.13) to add to its equity base.
- the company's per share earnings had total losses of $7.48 a share.
Interpretations:
- This means that management had to spend $7.48 a share in additional sums that they either borrowed or took from earnings retained during prior years.
- Since this $7.48 in shareholder capital was depleted, rather than paid out as a dividend, this is added to the $4.13 in retained earnings, giving a total of $11.61 a share that was kept from shareholders.
- Between 1990 and 2000, the company's per share earnings decreased from $0.82 a share to $0.25 a share. We can argue that the decrease in earnings was caused by the company being a price-competitive business that sucks up capital but does nothing to increase shareholders' wealth.
- If we subtract the 1990 per share earnings of $0.82 from the 2000 per share earnings of $0.25 , the difference is a negative $0.57 a share.
- Thus we can argue that the $4.13 a share retained between 1990 and 2000 and the $7.48 depleted during this period produced zero additional income.
- The company is in a tough business (steel) in which to develop a competitive advantage.
Company A: H&R BLOCK
Company B: WM. WRIGLEY JR. COMPANY
Company C: GENERAL MOTORS
Company D: BETHLEHEM STEEL
Also Read:
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
Return on Retained Capital
A simple mathematical formula measures the capital requirements of maintaining a company's competitive advantage and management's ability to utilize retained earnings to improve shareholders' wealth. In essense this calculation takes the amount of earnings retained by a business for a certain period and measures its effect on the earning capacity of the company.
With a durable competitive advantage the company will be able to use its retained earnings either to:
All three should have a positive effect on per share earnings.
On the other hand, a price-competitive business would need to spend its retained earnings to maintain its business to the face of fierce competition from other companies in the same line of business, leaving little or nothing to invest in new operations and/or buying back its shares.
Companies that have a durable competitive advantage usually don't have to spend a high percentage of their retained earnings to maintain their operations. The key word here is maintain. In theory, the more durable a competitive advantage, the less a business has to spend to maintain it. Warren Buffett's perfect business would be one that spends zero on maintaining its competitive advantage. That would free every dollar it earns to be paid out as a dividend or reinvested in the business, which should, in theory, make its shareholders even wealthier.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
With a durable competitive advantage the company will be able to use its retained earnings either to:
- expand its operations,
- invest in new businesses,
- and/or repurchase its shares.
All three should have a positive effect on per share earnings.
On the other hand, a price-competitive business would need to spend its retained earnings to maintain its business to the face of fierce competition from other companies in the same line of business, leaving little or nothing to invest in new operations and/or buying back its shares.
Companies that have a durable competitive advantage usually don't have to spend a high percentage of their retained earnings to maintain their operations. The key word here is maintain. In theory, the more durable a competitive advantage, the less a business has to spend to maintain it. Warren Buffett's perfect business would be one that spends zero on maintaining its competitive advantage. That would free every dollar it earns to be paid out as a dividend or reinvested in the business, which should, in theory, make its shareholders even wealthier.
Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
1. Warren Buffett has learned that a consistently high return on total capital is indicative of a durable competitive advantage. He is looking for a consistent ROTC of 12% or better.
2. With banks and finance companies he looks at the return of total assets ROA to determine if the company is benefitting from some kind of durable competitive advantage. Warren Buffett looks for a consistent return on assets ROA in excess of 1% (anything over 1% is good, anything over 1.5% is fantastic) and a consistent ROE in excess of 12%.
3. In situations where the entire net worth of the company is paid out, creating a negative net worth, Warren Buffett has only made investments in those companies that show a consistent ROTC of 20% or more. The high ROTC is indicative of a durable competitive advantage.
Also Read:
Wednesday 3 June 2009
Using ROTC Where the Entire Net Worth of the Company has been taken out
This is rare and can only happen if the earning power of the company is exceptionally strong. On occasion, a company has such a strong durable competitive advantage that its earning power allows it to pay out a portion or all of its entire net worth to shareholders.
- In this situation shareholders' equity decreases, which in turn causes the ROE to increase dramatically - often to 50% or better.
- When the entire net worth is paid out, it creates a negative net worth, which means that the company will not report a return on shareholders' equity even if it is earning a fortune.
Advo is the nation's largest direct-mail marketing company. Think of it as an advertising company. Its competitive advantage is that it is the biggest, the best, and the most cost effective at the direct-mail game. Advo was originally founded in 1929. Talk about durable! Until 1996 it had seen a long and steady growth of its per share earnings and had produced consistent returns on shareholders' equity in the 18% to 20% range. From 1986 to 1996 it carried zero long-term debt. That's right, zero debt. Then in 1996 it added $161 million in debt and paid it out to sharehodlers via a $10-per-share dividend. This effectively wiped out the $130 million in shareholders' equity that it carried on its books and replaced it with debt. Advo can do this because the earning power of the business is so strong and consistent. Few companies can do this, and those than can, almost without exception, benefit from some kind of durable competitive advantage.
In situations like this in which there is no net worth, you need to look at the return on total capital (ROTC). In 2000, Advo posted a 35% ROTC.
Historically, in these situations, Warren has only made investments in companies that show a CONSISTENT ROTC of 20% or better.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
ROA of Banks, Investment Banks and Financial Companies
Banks, investment banks and financial companies rely on borrowing large amounts of money that they hope to loan out at higher interest rates to businesses and consumers.
A company like Freddie Mac, which deals in residential mortgages, carries $175 billion in short-term debt and $185 billion in long-term debt. If your business is borrowing money at 6% and loaning it out at 7%, there is no way your return on total capital ROTC is going to even approach 12%.
In these instances, Warren Buffett likes to look at what the bank or finance company earned in relation to the total assets under its control. The rule here is, the higher the better. Anything over 1% is good and anything over 1.5% is fantastic.
Learning Point
With banks, investment banks, and financial companies, look for a consistent return on assets ROA in excess of 1% and a consistent return on shareholders' equity ROE in excess of 12%.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
A company like Freddie Mac, which deals in residential mortgages, carries $175 billion in short-term debt and $185 billion in long-term debt. If your business is borrowing money at 6% and loaning it out at 7%, there is no way your return on total capital ROTC is going to even approach 12%.
In these instances, Warren Buffett likes to look at what the bank or finance company earned in relation to the total assets under its control. The rule here is, the higher the better. Anything over 1% is good and anything over 1.5% is fantastic.
Learning Point
With banks, investment banks, and financial companies, look for a consistent return on assets ROA in excess of 1% and a consistent return on shareholders' equity ROE in excess of 12%.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
The Right Rate of Return on Total Capital (ROTC)
Problem with ROE
The problem with looking at high rates of return on shareholders' equity is that some businesses have purposely shrunk their equity base with large dividend payments or share repurchase programs. They do this because increasing the return on shareholders' equity makes the company's stock more enticing to investors. Thus, you will find companies in a price-competitive business, like General Motors, reporting high rates of return on shareholders' equity. To solve this problem, Warren Buffett looks at the return on total capital (ROTC) to help him screen out these types of companies.
ROTC
ROTC is defined as the net earnings of the business divided by the total capital in the business. (Total capital = Equity + Long-Term Debts + Short-Term Debts).
Warren Buffett is looking for a consistently high rate of ROTC, AND, a consistently high rate of ROE.
General Motors' return on equity for the 10-year period (1992 to 2001) was an average annual rate of 27.2%, which is very respectable but suspect because of the 0% return in 1992. Its total return on capital (ROTC) for the 10-year period shows a different story. Its 9.5% average is not enticing. Compare this to H&R Block, which logged in an average annual rate of ROE of 21.5% and an average annual total return on capital (ROTC) of 20.7%.
Take Home Message
The problem with looking at high rates of return on shareholders' equity is that some businesses have purposely shrunk their equity base with large dividend payments or share repurchase programs. They do this because increasing the return on shareholders' equity makes the company's stock more enticing to investors. Thus, you will find companies in a price-competitive business, like General Motors, reporting high rates of return on shareholders' equity. To solve this problem, Warren Buffett looks at the return on total capital (ROTC) to help him screen out these types of companies.
ROTC
ROTC is defined as the net earnings of the business divided by the total capital in the business. (Total capital = Equity + Long-Term Debts + Short-Term Debts).
Warren Buffett is looking for a consistently high rate of ROTC, AND, a consistently high rate of ROE.
General Motors' return on equity for the 10-year period (1992 to 2001) was an average annual rate of 27.2%, which is very respectable but suspect because of the 0% return in 1992. Its total return on capital (ROTC) for the 10-year period shows a different story. Its 9.5% average is not enticing. Compare this to H&R Block, which logged in an average annual rate of ROE of 21.5% and an average annual total return on capital (ROTC) of 20.7%.
Take Home Message
- Companies with a durable competitive advantage will consistently earn both a high rate of ROE and a high rate of return on toal capital (ROTC). Again, the key word is CONSISTENT.
- Companies in a price-competitive business, will typically earn a low rate of ROTC.
- Warren Buffett looks for a consistent ROTC of 12% or better.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
Return on Total Capital (ROTC)
Return on Total Capital (ROTC)
Total Capital = Long-Term Debt + Short-Term Debt + Equity
Return on Total Capital = Net Earnings / Total Capital
The calculation of ROTC is illustrated here: http://files.shareholder.com/downloads/SYY/654431717x0x226567/EC4E58FF-E488-4CBB-A19B-570745E81387/Non-GAAP%20ROTC%20calculation.pdf
It is important to note the numerator and the denominator used in calculating ROTC by various other groups.
Total Capital = Long-Term Debt + Short-Term Debt + Equity
Return on Total Capital = Net Earnings / Total Capital
The calculation of ROTC is illustrated here: http://files.shareholder.com/downloads/SYY/654431717x0x226567/EC4E58FF-E488-4CBB-A19B-570745E81387/Non-GAAP%20ROTC%20calculation.pdf
It is important to note the numerator and the denominator used in calculating ROTC by various other groups.
- Value Line defines the return on total capital as "annual net profit plus 1/2 of annual long-term interest divided by the total of shareholders’s equity and long term debt." Shareholders’s equity is the net worth of the company.
- Some defines total capital as equity plus long-term debt.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
Return of capital
Return of capital
A distribution of cash resulting from depreciation tax savings, the sale of a capital asset or securities, or any other transaction unrelated to retained earnings.
A distribution of cash resulting from depreciation tax savings, the sale of a capital asset or securities, or any other transaction unrelated to retained earnings.
Return on Total Assets
Return on Total Assets
Abbreviated as ROTA, refers to a measure of how effectively a firm uses its assets.
Calculated by (income before interest and tax) / (fixed assets + current assets).
Abbreviated as ROTA, refers to a measure of how effectively a firm uses its assets.
Calculated by (income before interest and tax) / (fixed assets + current assets).
Return on Assets
Return on Assets
Abbreviated as ROA, refers to a measure of a firm's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Abbreviated as ROA, refers to a measure of a firm's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Return on Investment
Return on Investment
Abbreviated as ROI, refers to a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.
Abbreviated as ROI, refers to a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.
Return on Equity
Return on Equity
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Return on Invested Capital
Return on Invested Capital
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
Return on Capital Employed
Return on Capital Employed
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Return on Capital
Return on Capital
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
- If the Return on Invested Capital of a firm exceeds its WACC, then the firm created value.
- If the Return on Invested Capital is less than the WACC, then the firm destroyed value.
Where Warren Buffett Discovers Companies with Hidden Wealth
Warren Buffett has discovered 4 basic types of businesses with durable competitive advantages:
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
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