Bloomstran discusses Berkshire with O’Shaughnessy
https://www.joincolossus.com/episodes/21729827/bloomstran-be…
7 Likes
Fantastic interview but did not address the most important point: VALUATION
We know the BRKB attributes backwards and forwards
Is IV still $400/B share? How fat is this pitch?
"
Is IV still $400/B share? How fat is this pitch?"
very fat
This conversation is from 3 years ago so I don’t think you were going to get an update on today’s share price / value
My bad - for some reason it played the 2019 version for me but I see the link is to the 2022
He basically says great collection businesses and we love management
We know that
ONLY thing that matters is valuation
Thanks. Spectacular podcast which should honestly be a Must listen for any owner!
Great and insightful commentary on current state and valuation of Berkshire, why our Insurance is #1 in the world, enormous statutory capital and extreme underwriting discipline, why Alleghany is such a great fit and why their float and returns are much more valuable within Berkshire, strength and background of their CEO Joe Brandon, BNSF value and strength with regulated returns, BHE extremely bright future tax advantaged growth/regulated returns, only 3% note on 100B debt,OXY/preferred/warrants/Carbon capture potential, Dominion pipelines and LNG, realistic opinion on continued need for O&G, MSR steadiness with annual sales/income of 150B/11B, BRK 50B normalized annual earnings, earnings yield 8.3% of our businesses combined with growing dividends and retained earnings of investees, tax savvy leadership, increased ability to see the future a decade out, 10% capital allocation hurdle, ROE 10-12%, the Golden Rule of management, strength of the current Board with skin in the game and much more. I would be quite pleased if Bloomstran was invited to join the Board in time.
10 Likes
The only discussion I heard on valuation was on a “look through” earnings basis of 12x
Surprised he never got into IV and or the visibility of the earnings, which are obviously in question now with bust of the biggest credit bubble in global history.
1 Like
BRK 50B normalized annual earnings
That’s more than double the actual earnings…
What does he have for look-through earnings of the investees?
“What does he have for look-through earnings of the investees?”
From p.86 of his 2021 Semper Augustus client letter:
“In addition to a subsidiary driven sum of the parts analysis, deriving the earning power from the groups and moving parts is also crucial. Berkshire’s normalized net earning power is $47.8 billion at yearend. Pre-tax earnings are $53.3 billion. Of the pre-tax normalized earnings, $5 billion comes from dividends earned and $11.7 billion is the portion of Berkshire’s share of the stock portfolio companies retained and not distributed as profit. Dividends plus retained earnings total the earnings yield, again 5.1% at yearend. From an earning power standpoint, by assuming Berkshire only earns the earnings yield presumes an
annual expected return equal to the earnings yield. If instead the analyst believes the stock portfolio will earn 10.2% annually, double the earnings yield, then my normalized earnings from the stock portfolio are understated by half, or by $16.7 billion. Presuming retained earnings are invested at adequate returns, then over time it’s not unreasonable to expect at least a dollar of retained earnings producing a dollar of market value. Earnings retained at higher and higher returns should translate into more earnings than are recorded as current earning power. This is a conservative aspect of the Semper valuation.
Take note of the way dividends are taxed and retained earnings are presumed taxed. Dividends received by corporations from other U.S. companies receive a 50% dividend received deduction on holdings less than 20% owned. Thus, at the 21% Federal tax rate, corporations pay a 10.5% rate on dividends received. For businesses more than 20% owned, the deduction is 65% making the rate 7.35%. However, for property and casualty companies, 25% of the deduction is disallowed under a proration rule. Thus, 62.5% of dividends received, and not 50% received, are taxed at 21%, making the tax rate on dividends from U.S. companies less than 20% owned 13.125%. Dividends are already taxed by the distributing company, hence the deduction. Mr. Buffett has mentioned Berkshire’s blended rate on dividends received is about 13% from all sources.
Retained earnings are also already taxed at the company owned, but unless eventually distributed Berkshire will only see appreciation in underlying shares. If held permanently or for many years, any capital gains taxes paid upon actual sale may be years in the future. A 3% hypothetical tax rate is hence applied reflecting long-term deferral and the time value of money.“
8 Likes
Berkshire’s normalized net earning power is $47.8 billion at yearend. Pre-tax earnings are $53.3 billion. Of the pre-tax normalized earnings, $5 billion comes from dividends earned and $11.7 billion is the portion of Berkshire’s share of the stock portfolio companies retained and not distributed as profit.
So, look through is $16.7 billion pre-tax? Does that seem low?
So, look through is $16.7 billion pre-tax? Does that seem low?
Seems about right, using Mr Buffett’s definition of look-through to mean earnings NOT paid out as dividends.
I estimate earnings around $22.3bn and dividends around $6.2bn, making retained/look through about $16.1bn. Same ballpark.
That for the items in the “equities” line item only.
So it’s excludes earnings from equity method investments (Kraft Heinz et al.)
Jim
8 Likes
The Bloomstran quote: “Berkshire’s normalized net earning power is $47.8 billion at yearend. Pre-tax earnings are $53.3 billion.
Of the pre-tax normalized earnings, $5 billion comes from dividends earned and $11.7 billion is the portion of Berkshire’s share of the stock portfolio companies retained and not distributed as profit.”
using Mr Buffett’s definition of look-through to mean earnings NOT paid out as dividends.
I estimate earnings around $22.3bn and dividends around $6.2bn, making retained/look through about $16.1bn. Same ballpark.
Excluding dividends, isn’t Bloomstran saying $11.7 billion?
1 Like
So, look through is $16.7 billion pre-tax? Does that seem low?
========
Seems about right, using Mr Buffett’s definition of look-through to mean earnings NOT paid out as dividends.
I estimate earnings around $22.3bn and dividends around $6.2bn, making retained/look through about $16.1bn. Same ballpark.
That for the items in the “equities” line item only.
So it’s excludes earnings from equity method investments (Kraft Heinz et al.)
I think Buffett uses the term ‘look-through earnings’ to be the total of all the earnings, not just the retained. Here is how he has defined it originally in 1999 (or at least, mentioned it in his ‘Owner’s Manual’, annexed to the annual report):
We attempt to offset the shortcomings of conventional accounting by regularly reporting “look-through” earnings (though, for special and nonrecurring reasons, we occasionally omit them). The look-through numbers include Berkshire’s own reported operating earnings, excluding capital gains and purchase-accounting adjustments (an explanation of which occurs later in this message) plus Berkshire’s share of the undistributed earnings of our major investees - amounts that are not included in Berkshire’s figures under conventional accounting. From these undistributed earnings of our investees we subtract the tax we would have owed had the earnings been paid to us as dividends. We also exclude capital gains, purchase-accounting adjustments and extraordinary charges or credits from the investee numbers.
https://www.berkshirehathaway.com/owners.html, Principle #6
Here’s how Bloomstram describes the look-through earnings of the equity portfolio (p.86):
In addition to a subsidiary driven sum of the parts analysis, deriving the earning power from the groups
and moving parts is also crucial. Berkshire’s normalized net earning power is $47.8 billion at yearend.
Pre-tax earnings are $53.3 billion. Of the pre-tax normalized earnings, $5 billion comes from dividends
earned and $11.7 billion is the portion of Berkshire’s share of the stock portfolio companies retained and
not distributed as profit.
So I believe Bloomstram is referring to the full value of dividends plus retained earnings, in the equity portfolio, pre-tax, as AdrianC surmised, and not just the (larger) retained earnings part. Perhaps the discrepancy between Jim’s numbers and Bloomstran’s is from what is included in the equity portfolio?
dtb
Presuming retained earnings are invested at adequate returns, then over time it’s not unreasonable to expect at least a dollar of retained earnings producing a dollar of market value.
Looks like this one slipped by the copy editor. I want, and expect a dollar of retained earnings to produce at least a dollar of market value, not the other way around. I certainly wouldn’t call a dollar of market value achieved using more than a dollar of retained earnings to be an adequate return.
1 Like
"Berkshire’s normalized net earning power is $47.8 billion at yearend. Pre-tax earnings are $53.3 billion.
Of the pre-tax normalized earnings, $5 billion comes from dividends earned and $11.7 billion is the portion of Berkshire’s share of the stock portfolio companies retained and not distributed as profit."
…
Excluding dividends, isn’t Bloomstran saying $11.7 billion?
Based on that snippet, it does seem that way.
And the normalized earnings seem too low, too.
The rolling four quarter gain in shareholders’ equity in recent quarters has been:
76,422m
76,914m
57,325m
63,035m
60,154m
The three year average has been $46bn spanning the pandemic, close to his figure which seems too conservative for today’s normalized rate.
Is this quote from an old write-up?
Jim
4 Likes
And the normalized earnings seem too low, too.
The rolling four quarter gain in shareholders’ equity in recent quarters has been:
76,422m
76,914m
57,325m
63,035m
60,154m
The three year average has been $46bn spanning the pandemic, close to his figure which seems too conservative for today’s normalized rate.
Is this quote from an old write-up?
Jim
Aren’t your figures above capturing capital gains? Capital gains net of tax have apparently been higher than look through earnings but that shouldn’t surprise anyone in a bull market.
1 Like
I’ve come back around to more-or-less agreeing with Bloomstran on look-through.
Did a quick and dirty on the top 5 investees:
Eps (from Yahoo) x shares owned = $13.4bn
That’s 72% of the portfolio, so assume total is 13.4/0.72 = $18.6bn
(Bloomstran said $16.7bn as of 3rd quarter 2021)
To make a quick and dirty IV estimate:
Non-insurance businesses trailing 4 quarters: $21.2bn
Partially owned: $1bn
Look through: $18.6bn
Total: $40.8bn
Multiple of 15: $612bn
Cash/bonds available to invest: $80bn
IV per B share: $313
2 Likes
So why did WEB do buybacks in low $300’s and as high as $322/b share?
Makes no sense
He knew his stocks could get hit. He ONLY buys with large margin of safety.
DBB,
In order to answer the question regarding buybacks at higher prices,you will need to look beyond three to six months and consider what BRK looks like in ten years.
There is never a future price guarantee.Price of $xxx,is good enough to make sense in a long term context. It does not matter what the future price is because it is impossible to know until the future occurs.This seems to be an impossible concept for some to understand.
Jk
2 Likes