I have, more often than not, referred to this aspect of "liquidation of assets" and that transference to shareholders, when the subject of the discount of share price to Book Value per share has come up, more especially on this board, as it was one of the "central themes" of Ben Graham's investment strategy .... obviously not the only one, i.e. buying something for 50c that was worth a dollar. Of course, for a shareholder to realize that "dollar" something needs to be liquidated.
And, Yes, BRK has only once (to the best of my knowledge) paid a dividend, and not again since. As Buffett has publicly stated, he believes he can earn more for the company and its shareholders by using that dividend amount and investing it himself.
And the proof of that pudding is the CAPITAL GAIN he has achieved for his shareholders.
And as we know, there are two Primary avenues that a shareholder gets a return on his investment in a company's stock, (a) he/she gets a Dividend payment, and (b) he/she obtains a Capital Gain in terms of selling his shares at a greater price than what he/she paid for it.
With all that in mind, I come back the the P/BK aspect ... the way I see it, to purchase a company's stock Purely on the basis that it has "Value" because its share price is lower than its Book Value per share, and therefore there is the assumption that its price will move back to that book value per share number, can be "fraught with danger".
I believe that was one of the aspects that caused Buffett to adopt his own investment strategy in the early days when he was involved with Graham. There were times when the share prices of those "discounted" companies didn't move back to their BV's, but some even went on to bankruptcy due to the poor nature of their business and its performance.
I believe one should first scrutinize those relevant aspects of a company's Financial Statements and determine whether or not that information warrants buying those shares or not.
That's why I have put forward the suggestion that having a read of "Warren Buffett and the Interpretation of Financial Statements" may be a good idea and may give the reader a good insight as to what Buffett Actually looks for in a company and when and why he usually buys its stock.
Quite often when I've seen someone state that they are going to buy a company's shares because it is at a discount to its BV/share, and I then look into that company's financials, based on the financial criteria that Buffett looks at, plus some of my own that I was taught by someone else, then I find it hard to believe that the company in question is a good buy at that stage. More often than not it is losing money, has large debt expense, has very little Revenue left over at EBITDA, etc, etc.
On the other hand, when a good quality company, such as a KO, is trading at a discount to its BV/share, that usually occurs when the Market, as a whole, is in a slump, and virtually everything is down. So that's when the likes of Buffett (and me !! if I have the cash !!) will buy its shares.
When you look at the financials off those companies, more especially their Income Statement, there is nothing there that shows a poorly run business, or one having problems producing a healthy Bottom Line.
And Buffett largely uses his "principle" of an "Equity Bond" when he determines the right price to buy a company's stock, in terms of the time factor related to the benefit he will obtain from the "coupon". So there's is little, if anything there, about discount to BV/share, bearing in mind that his "Equity Bond" calculation is based on the parameters contained in :-
EQUITY BOND = SHARE PRICE = COUPON RATE/LONG TERM CORPORATE BOND RATE (L.T.C.B.R.)
and .... COUPON RATE/(L.T.C.B.R.) = PRETAX EARNINGS/( L.T.C.B.R.)
And as we know, "Pretax Earnings" is a function within that Income Statement when most of a company's Deductions and Expenses have been subtracted from its Gross Revenue, and which will then give one a good indication as to how much Revenue is left over to reach the Bottom Line and thence to the Retained Income on that company's Balance Sheet .... and contribute to its book value.
And having an investment in a company, which is largely involved in the Real Estate (RE) business, can certainly be a good one. But it may be prudent to interrogate as to where that Real Estate is and what Revenue it is providing in terms of rental income, etc, and what it is costing the company to manage and service that Real Estate. No doubt the latter will be reflected on its Income statement and Bottom Line.
Before Hurricane Katrina hit New Orleans there may have been good Assets reflected on a company's Balance Sheet that owned property in what were regarded as good areas in that city.
However, that possibly didn't mean that much in the aftermath of that natural disaster, especially if, for example, rental income fell behind expenses .... |
