wow… 29 PE very little growth over the years.
Warren will never sell but this baby is overpriced IMO
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Coke’s earnings appear to have been pretty much on trend in 2005. Not an unusually good nor unusually bad year, at $1.50 in today’s money.
Earnings per share up by inflation + 2.6%/year since then, using a recent figure of $2.32.
That’s not a lot of progress to show for 16.5 years of work.
That’s the per share figure, so it counts the effects of buybacks, accounting for about 0.4% per year of the EPS growth.
So if you look at the per-share growth figure, the earnings spent on those buybacks can not also be counted in owner earnings.
At least it’s a positive number, assuming current earnings aren’t above trend.
Like you, it’s not clear to me why people would pay 28.5 times current earnings ($66.17 as I type) for a share of that business.
If Berkshire sold at the current tick, it would raise cash of $52.95 per share net, or 22.8 times current earnings.
The question is, could that $21.2bn of cash be put to better use within a reasonable time frame?
I think so.
Does that mean I’m giving management a lot of credit thinking they could deploy the money skilfully, or no credit because they aren’t trying?
Jim
7 Likes
Agree it is overpriced, but also agree that holding is not the worst idea. I know dividends don’t matter, but $704m growing annually in dividends on a $1.2b cost basis is not the worst problem in the world.
3 Likes
So Jim on Coke I’m one that agrees with you, but there’s a problem. I inherited Coke in 1975, I haven’t reinvested dividends. I’ve held with a fabulous result (of course not in recent years) not because of investment acumen but because of little confidence as to how to change without going backwards…which is basically my entire history dealing with money. Fear of losing is my game.
But anyway there’s a point where, and surely it has been that way in the past, that selling and paying fed/state cap gain taxes is still logical. If you’ve ever gone so far as to figure that kind of stuff out? Well, I’d love to read about it, it is basic math coupled with assumptions and it is those assumptions that get quite hard.
Just rambling.
1 Like
Agree it is overpriced, but also agree that holding is not the worst idea. I know dividends don’t matter,
but $704m growing annually in dividends on a $1.2b cost basis is not the worst problem in the world.
It’s certainly a fair point in that holding certainly avoids the problem of what else one could do with the money.
But the cost basis doesn’t matter that much…what matters more is the proceeds, after tax, of a putative sale.
Because if the choice is selling or staying pat, then it’s the opportunity cost that matters.
Dividends per share over time can’t rise faster than earnings per share, which have risen in the range of zip to 2.6%/year depending on the time frame considered.
So, a better way to think of it is this:
We’re getting a dividend return of $704m, which is a return of 3.32% on the after-tax amount of cash we’d have if we sold and paid the corporate capital gains tax.
That dividend is likely going to track inflation, or rise very very slowly.
Is there really no other way to deploy $20bn at better than 3.3% (and almost no real growth) with extremely high reliability?
Maybe there isn’t.
Hmmm…tender offer buybacks…
Jim
5 Likes
But anyway there’s a point where, and surely it has been that way in the past, that selling and
paying fed/state cap gain taxes is still logical. If you’ve ever gone so far as to figure that kind of stuff out?
It’s not hard.
The secret it to think of the amount of money that you are trying to deploy is the after tax proceeds if you sold, not the market value of your position.
Estimate your capital gains tax if you sold it all.
That give you the size of pile of cash you’d have afterwards.
You can also divide by your share count to get the cash per share you’d have left, call it “Net P”
Then you have two options.
(a) Stay pat. You’re getting $1.76/year in dividends as return on “Net P”.
Is that a good rate of return?
I don’t know your tax rate, but it’s presumably in the 2.5% to 3.5% return range.
The retained earnings are doing you very little good, other than letting the dividend keep up with inflation and perhaps a wee bit more.
So, the total return is not really materially more than the dividend return.
(b) Buy something else with that pile of after-tax cash.
As one obvious example to consider, put it all into Berkshire.
About a month ago it would take 5.8 Coke shares to buy a BRK/B; now it only takes 5.2.
Back in 2019-2020 it took only 4.1-4.4 most of the time.
The absolute prices don’t matter when trying to “time” this; only the ratio matters.
You want the latest point on this graph to be low the day you do the swap.
https://stockcharts.com/h-sc/ui?s=BRK%2FB%3AKO&p=D&y…
What return might you reasonably expect from your newly purchased Berkshire?
If I had to guess, maybe inflation tracking for a year, then inflation+7%/year thereafter, perhaps 8%.
All as capital gains, probably none as dividends.
If you want the income, you’d have to start a periodic sale program, say selling 1% of your position per quarter.
So, as an exercise: how long till you are better off having sold KO, paid the huge tax bill, and bought BRK?
How much better off are you likely to be 15 years from now?
If (a big if) your expectations of the two firms are the same as mine, the conclusions would be
- this is not the best time to do it, as Berkshire isn’t particularly cheap at the moment, but
- even so, it’s a no brainer.
Jim
13 Likes
But anyway there’s a point where, and surely it has been that way in the past, that selling and paying fed/state cap gain taxes is still logical. If you’ve ever gone so far as to figure that kind of stuff out? Well, I’d love to read about it, it is basic math coupled with assumptions and it is those assumptions that get quite hard.
Currently the LTCG tax is only 15%. Heh, “only”. 
Look at it this way: Some part of your profit belongs to Uncle Sam. He is patient and is willing to let you hold it for him. But it does belong to him and he will eventually collect it. All you get to decide is the timing of when Uncle Sam gets it.
1 Like
Is there really no other way to deploy $20bn at better than 3.3% (and almost no real growth) with extremely high reliability?
Reminder, there is already probably $50B-$75B of “excess” capital that needs to be deployed (and growing at $10B - $20B per quarter); so adding to that pile probably isn’t an urgent problem to solve.
tecmo
…
6 Likes
So, a better way to think of it is this:
We’re getting a dividend return of $704m, which is a return of 3.32% on the after-tax amount of cash we’d have if we sold and paid the corporate capital gains tax.
That dividend is likely going to track inflation, or rise very very slowly.
Is there really no other way to deploy $20bn at better than 3.3% (and almost no real growth) with extremely high reliability?
Maybe there isn’t.
Hmmm…tender offer buybacks…
In addition to getting $20b back after tax, which could almost certainly be put to a better use than getting a steady 3.3% return, selling now would remove the tax liability which, if anything, is likely to increase some day, when the US government figures out that it has to stop raising $4.4t in taxes while spending $5.9t (the estimate for 2022; similar numbers projected for the next 5 years). If the after tax Coke stake went from $20b today to $18b in a few years, that would mean wiping out a few years of those 3.3% returns…
dtb
9 Likes
For your entertainment Jim I did sell my Lowe’s at $245 in mid November 2021 and put all of that into energy related stocks. I checked just a few days ago and Lowe’s was down 20% while my energy investments were up 53%
The problem is I’d like to sell the energy bunch now, but of course it has been just a few months.
LOL: Long term tax on Lowe’s (it was 85% profit) and short term on the scattered energy bunch?! Oh my!
As I told my CPA wife, “I am bored…” She knew the rest of the story. We never, almost never, sell anything.
It isn’t a big deal and honestly I’m glad I did it as it keeps me stimulated and feeling alive.
4 Likes
“So, as an exercise: how long till you are better off having sold KO, paid the huge tax bill, and bought BRK?
How much better off are you likely to be 15 years from now?”
Interesting exercise and speculation. My back of the envelope guess would be we would make up for the $5.6B tax bill on 400M shares @21% LTCG after 4-5 years with an immediate exchange of the after tax proceeds into BRK. Wow, after 15 years maybe at least 20-30B added intrinsic value after such exchange?!
Realistically, I would be very surprised to see WEB sell KO after 35 years. He is so loyal, loves the product and dividend. it has been a important part of BRK history and he served on the Board for years. Agree a trim or sell seems quite reasonable. I would not be shocked to see us sell when Greg ultimately takes the reins. Will be interesting for sure.
“So, as an exercise: how long till you are better off having sold KO, paid the huge tax bill, and bought BRK?
How much better off are you likely to be 15 years from now?”
…
Interesting exercise and speculation. My back of the envelope guess would be we would make up for the $5.6B tax bill on 400M shares @21% LTCG after 4-5 years with an immediate exchange of the after tax proceeds into BRK.
By my estimation, a person selling Coke, paying 21% capital gains tax, and buying BRK at current slightly-above-usual levels,
(with my dodgy forward return assumptions) would probably be better off by the end of year two.
Certainly by year three.
Jim
10 Likes
Maybe you are looking at KO position in the wrong way. Move it from the equity investments to fixed income investments bucket and it makes more sense. Pretty safe investment that will pay out a growing stream of dividends indefinitely. Probably higher total return than the bonds for a slightly higher risk. Don’t compare it to Apple or BRK itself. Time to sell might be when Buffett needs to raise funds for an elephant, but not before, when there is so much excess cash.
I am viewing some of his recent investments in OXY, HPQ and VZ in the same light. Not home run stock picks, but use of excess cash to earn a decent total return, in an overvalued market where growth is highly priced. All three companies likely to be around for a decade or longer and low risk of being disrupted. Also HPQ and VZ are oligopolies of 3 companies in their sectors, with new entrants unlikely.
13 Likes
I think Buffett understood that selling KO and buying BRK would be better off in long term. Why hasn’t he done it? It’s most likely due to personality. KO has been a very good memory, and he can’t get rid of it unless it starts to turn bad.
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I think Buffett understood that selling KO and buying BRK would be better off in long term. Why hasn’t he done it? It’s most likely due to personality. KO has been a very good memory, and he can’t get rid of it unless it starts to turn bad.
I think it’s more likely that BRK has so much excess cash that they can already fund all the buybacks they are willing to do. So they leave the money in KO earning a decent dividend instead of converting to cash earning nothing.
4 Likes
So Jim on Coke I’m one that agrees with you, but there’s a problem
Yeap… it should be Jack and Coke.
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Maybe you are looking at KO position in the wrong way. Move it from the equity investments to fixed income investments bucket and it makes more sense. Pretty safe investment that will pay out a growing stream of dividends indefinitely. Probably higher total return than the bonds for a slightly higher risk.
Gosh darn-it, I think you are right! It’s a bond in the berkshire portfolio.
1 Like
I was thinking Long BRK vs Short KO might be an interesting pair here. Especially after KO vertical run the past weeks
Seems like the entire Staples sector is looking pricey (KO, PEP, HSY, COST, PG, MKC, etc.) Many trading 25-30X earnings with little/no growth. Looks like many are on the high end of the valuation range.
Thoughts?
Any other longs vs. staples?
I think it’s more likely that BRK has so much excess cash that they can already fund all the buybacks they are willing to do.
So they leave the money in KO earning a decent dividend instead of converting to cash earning nothing.
I tend to agree.
There is no need for more cash at this time, and it has so far been a fine “set it and forget it” position.
Very good way back when, lately more in the range of “good enough, give or take”.
If a great investment opportunity presented itself, I think management would consider liquidating some, especially given the lower tax rates in effect these days.
But it’s hard to see what that opportunity would be, so it’s hard to see what could cause them to consider closing the position.
Even if they spotted a great opportunity that required $150-200bn, Berkshire has a lot of untapped borrowing power at negative real rates.
I do, however, remember Mr Buffett saying something along these lines once:
When Mr Market is offering you a fantastic price for something, you should hesitate before turning him down.
I think there is such a price for Coke shares (as was seen around 1999) so it’s just a matter of where to draw the line.
Let’s say that 40 times trend earnings would do it, especially since back then there was reason to believe that Coke shares would rise in value at a pleasant rate.
Jim
10 Likes
Currently the LTCG tax is only 15%. Heh, “only”.
Look at it this way: Some part of your profit belongs to Uncle Sam. He is patient and is willing to let you hold it for him. But it does belong to him and he will eventually collect it. All you get to decide is the timing of when Uncle Sam gets it.
We should be thanking our lucky stars that it’s “only” 15%. We have the best and most stable equity environment in the world. We could figure out a lot of reasons, but our government has to be at the top of the list. Whether you want to pin it on freedom, our military, the education system, the interstate highway system, or anything else, it all is the environment created and/or protected by the government. It’s in our best interest to keep it funded.
6 Likes