"As I noted before, I have yet to identify a situation where Buffett paid more than 20 times free cash flow for a stock. And in most cases he paid less than 15 times. If you are putting 10-20% of your portfolio in a company - as both he and I have periodically done - you need a large margin of safety. Assuming that criterion is met, the appropriate multiple depends on the 10-year sustainable growth rate. Buffett has often bought lousy businesses, but he has rarely overpaid for a wonderful business."
I have to wonder what level of emphasis Buffett placed on what he paid for a stock in terms of the ratio one obtains from dividing Free Cash Flow by Shares Outstanding, i.e. Ratio "X" = (Total Cash from Operating Activities - Capital Expenditures)/Shares Outstanding ....
investopedia.com
From what I've read of Buffett's strategy he targets two components of the Cash Flow Statement ...
CAPITAL EXPENDITURES (CE) :- Buffett wants to see this as low as possible because a company with durable competitive advantage uses a far smaller portion of its earnings for capital expenditures than do those without a competitive advantage. As an example the likes of Coke and Moody's have been known to spend less than 20%, historically, of their Net Earnings on CE, while the likes of General Motors have been known to have spent over 400%, resulting in them to have borrowed heavily to pay for that, thereby incurring a revenue reducing Interest Expense.
REPURCHASE OF CAPITAL STOCK :- Buffett prefers to use excess monies to buy back a company's shares rather than to pay out dividends since the latter attracts tax for the shareholders. Buy back reduces outstanding shares which increases EPS and usually makes the share price go up.
So if Buffett wants low Capital Expenditure and wants to Buy Back shares, then Ratio "X" could be quite high, i.e. a larger Numerator divided by a smaller Denominator. So his preferred companies could end up with a relatively high Free Cash Flow per share ?
When it comes to what price Buffett is prepared to pay for a company's stock I'd say that he reverts to his Equity Bond analysis. I've attempted to summarize that in ....
Message 26421355
And two extracts relating to Price determination and Purchase timing are ...
So when stock markets tank and the price of virtually every company's shares falls appreciably (more often than not due to Fund Managers selling), including DCA companies that may not be "at fault here", then that seems to be a good time to buy more DCA and sit back and wait for them to inevitably climb back up again as has historically usually been the case .....
Needless to say, the trick is to first of all Identify a company that falls into the DCA category. |
