Wednesday, March 13, 2019

2019 February Dividend Summary

Two months into the new year and still have yet to make my first purchase for 2019.  Nonetheless, my inactivity has not precluded my accounts from receiving monthly dividend deposits.  February continued the streak of YoY dividend income gains, ringing in a favorable variance of 24%.  Take a look at the breakout of this monthly dividend income below as well as some highlights from my reading of Warren Buffett's latest annual shareholder letter.





As noted in the monthly summary above, volume increases across multiple positions drove the favorable variance such as the new position in PG that occurred in 2018 as well as additional investment in T and GIS in the past year which more than offset the position in OHI that I exited in 2018.  The net rate impact from dividend increases YoY accounted for 2.5% increase versus last year.  Despite double digit increases from ABT and AXP of 14.3% and 11.4%, respectively, T is a relatively high yielder with much lower growth which weighed down the favorable rate variance to 2.5% as would be expected.  Let's not overlook that neither CLDT nor GIS have increased their dividends in the past year, which of course also weigh down the favorable rate increase.  Nonetheless, one benefit to having relatively high yielding stocks such as T and CLDT in a portfolio is that the income received from the shares can be reinvested back into the stock or deployed elsewhere, in any event, the reinvestment of the income leads to great compounded returns in a portfolio.

One other transaction that I'll account for here in this post is the negligible distribution amount I received in February as a result of GE spinoff of its transportation business.  As of Dec. 31,2018, I owned 166 shares of GE and according to the details of the announcement on Feb. 4th, GE shareholders would receive approximately 0.005403 of a share of Wabtec common stock for each share of GE common stock held as of the record date.  This ration would have resulted in < 1 fractional share so as further stated in the announcement, no fractional shares of Wabtec common stock will be issued in the merger, and instead GE shareholders will receive cash in lieu of any fractional share.  This resulted in $64.36 being deposited into my account on Feb. 28th.  

Many are aware that a just over a couple of weeks ago, Warren Buffett released his most recent annual shareholder letter for 2018.  All though much of what I write below will not be news to those who already read his letter, below are some of the points and quotes I personally noted from the letter, much of which is quoted verbatim from the letter:
  • Compounded annual gain in per-share book value and per-share gain in market value of Berkshire (BRKA) between 1965 thru 2018 was 18.7% and 20.5%, respectively, compared to a 9.7% compounded return for the S&P 500 during the same period.  Long live Warren Buffett!
  • For the first time, Buffett acknowledges it is now time to abandon the practice of featuring the change in Berkshire's per-share book value and list three circumstances for why the metric has lost relevance (1) BRKA has morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses (2) BRKA equity holdings are valued at market prices, accounting rules require BRKA's collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years and (3) it is likely, over time, that BRKA will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below management's estimate of intrinsic value.  Each share repurchased results in per-share intrinsic value going up, while per-share book value goes down, which causes the book-value scorecard to become increasingly out of touch with economic reality.
  • Reminds shareholders that the prime goal in the deployment of capital is to buy ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics.  "We" need to make these purchases at sensible prices.  Buffett describes his thinking with respect to stock purchases as being focused on calculating whether a portion of an attractive business is worth more than its market price.  
  • Buffett describes the business segments as "groves" (Focus on the Forest - Forget the Trees) and divides them in to 5 categories (1) most valuable grove is BRKA's the many dozens of non-insurance businesses that BRKA controls with between 80-100% ownership (2) "runner-up grove" is the collection of equities BRKA owns, typically involving a 5-10% ownership position in a very large company which collectively were worth nearly $173 billion at 2018 year-end (3) third grove is BRKA's business ownership of a quartet of companies in which we share control with other parties [i.e. Kraft Heinz and Pilot Flying J], (4) fourth grove is the collection of $112 billion held in US Treasury Bills and other cash equivalents and the (5) fifth grove is BRKA's collection of exceptional insurance companies.
  • A point of key and lasting importance: Berkshire's value is maximized by having assembled the five groves into a single entity.  At BRKA, the whole is greater - considerably greater - than the sum of the parts.
  • Truly good businesses are exceptionally hard to find.  Selling any you are lucky enough to own makes no sense at all.
  • A company's stock repurchases should be price-sensitive: Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or over-optimistic CEOs.  Buffett also comments that all of BRKA's major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares.  Buffett and Munger very much like that: If Charlie and Buffett thing an investee's stock is underpriced, they rejoice when management employs some of its earnings to increase Berkshire's ownership percentage.
  • "Rational people don't risk what they have and need for what they don't have and don't need."
  • Buffett describes how he acquired 1/3 of GEICO within a few months in the mid 1970s for $47 million which shortly thereafter grew to 1/2 ownership of the company as a result of share repurchases.  He begin acquiring share of GEICO after poor management grossly under estimated loss costs driving it to near bankruptcy.  Once the poor management had been replaced with Jack Bryne who Buffett met soon after Jack took the CEO position, Buffett concluded GEICO was a worthy investment.  Nearly two decades later, the remaining 50% of the company was bought for $2.3 billion, about 50x what was paid for the first half (Buffett: "and people say I never pay up!")
  • He highlights that BRKA's major equity holdings earn their profits without employing excessive levels of debt.
  • Before heading in the final section of the letter titled "The American Tailwind", Buffett states that on occasion, a ridiculously-high purchase price for a given stock will cause a splendid business to become a poor investment - if not permanently, at least for a painfully long period.
  • The last section Buffett highlights the magnificent accomplishments that have occurred in America despite many alarming headlines that described unfortunate events such as natural disasters, high inflation, a great depression, and multiple wars.  Buffett references the the Civil war in which killed 4% of all American males and led President Lincoln to openly ponder whether "a nation so conceived and so dedicated could long endure."  Despite many of the events happening during his lifetime, he highlights that if his initial investment of $114.75 in 1942 would have remained invested in an S&P index fund it would have grown to be worth (pre-taxes) $606,811 on January 31, 2019, a gain of 5,288 for 1.  Had he instead invested that same sum of money to buy 3 1/4 ounces of gold to "protect" himself from the calamities that would come, the value would have only grown to be worth about $4,200, less than 1% of what could have been realized from a simple unmanaged investment in American business.  The magical metal was no match for the American mettle.
  • Furthermore, our Country's almost unbelievable prosperity has been gained in a bipartisan manner.  Since 1942, we have had seven Republican presidents and seven Democrats.  In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.
  • Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend.
  • There are so many other countries around the world that have bright futures.  About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive.
  • Over the next 77 years, however, the major source of BRKA's gains will almost certainly be provided by The American Tailwind.  We are lucky - gloriously lucky - to have that force at our backs.
What are you thoughts on what has transpired in the first couple months of the new year and/or what are your thoughts regarding topics Warren Buffett touched upon in his latest letter?  Anyone planning to attend this year's "Woodstock for Capitalist" event in person on May 4th?  I have not been to a BRKA annual shareholder meeting in person, but I would certainly like to do so while both Buffett and Munger are at the helm.  I will not be able to attend this year, but I am thinking I may plan to attend next year in 2020, we'll see.

6 comments:

  1. I still need to sit down to read Buffett's latest letter but haven't yet had the time. Based on your quick hits it looks like there's plenty of nuggets of wisdom in there, as usual. Also great job growing your February dividends! Getting them up over $300 is fantastic.

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    1. Yes, definitely take a chance to read his latest letter when you have a moment. The 2018 letter seemed to be a bit shorter with respect to number of pages than is typical - 14 pages for 2018 versus 20+ pages in 2016 and prior. Regardless of the number of pages, they are always filled with beneficial information for all who read them and I appreciate his optimistic outlook on the long term growth of the American economy and the world at large, despite the hiccups that come along.

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  2. Like PIP, I should read buffett's letter. I haven't had the chance yet to do so, but thank you for the wonderful summary here. I missed that GE spin-off and it is interesting that the fractions were so small and cash was distributed to many. That company has always made it interesting this year, that's for sure.

    Great month of dividend income by the way and keep up the hustle and grind!

    Bert

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    1. The Wabtec merger was not something that was top of mind when I noticed the deposit in my account so I had to look into it and determine what that was all about. Decided to include in the February post so if I were to forget, I could circle back here to jog my memory :)

      The recent turbulence experienced by GE shareholders in recent years, including this Wabtec merger, brings to mind Forrest Gump's famous line that aptly applies to those hanging on to GE "like a box of chocolates. You never know what you're gonna get."

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  3. Even with selling OHI that is some serious YOY. Keep it up.

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    1. Thanks! OHI was a short lived investment for me - I think I owned it for about a year, maybe less. I nearly have March's dividend summary ready for posting, which I am excited about - it has been a great 1st quarter for 2019!

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