dkass

Apr 152018
 

A very interesting article in today’s Washington Post discusses the issue of stock buybacks by corporations.

Stock buybacks along with cash dividends enable companies to return capital to shareholders.  Stock buybacks are a tax efficient means of doing so.  Whereas cash dividends are taxable to shareholders, stock buybacks are not (unless shares are sold with a capital gain).  Since stock buybacks reduce the supply of outstanding shares, they should increase the price of these shares over time.  However, Warren Buffett has stated that a company should repurchase its own shares only at prices below its intrinsic value.  Specifically, Buffett will repurchase shares of Berkshire Hathaway at prices below 1.2 times book value.  At Berkshire’s closing price of $295,891 per class A share on April 13, it traded at 1.4 times its book value of $211,750 as of December 31, 2017.  Buffett considers Berkshire’s intrinsic value to exceed 1.2 times book value and is allowing for a “margin of safety”.

Many companies buy back their shares on a regular basis.  To the extent that these shares are being purchased at prices above their intrinsic value, Buffett would conclude that shareholder value is being destroyed.

Intrinsic value for a specific company can be estimated by performing a discounted cash flow analysis based on projected future free cash flows and an appropriate discount rate.

 

(Note:  This blog post has been published by Investing.com.)

 

 Posted by at 11:15 am
Apr 132018
 

CNBC’S “WARREN BUFFETT: INVESTOR, TEACHER, ICON” 

This CNBC original documentary takes viewers inside the story of Warren Buffett’s extraordinary success.  With a blend of wisdom and common sense, Buffett is more than just one of the most successful investors in American history.  He’s also a teacher who has had a tremendous influence on people around the world.  Correspondent Becky Quick profiles Buffett and some of the many people whose lives have been influenced, and even changed, by his investment advice and life lessons. Some are famous, and others unknown – everyday folks, some running small ventures, who feel a connection to one of the wealthiest people on the planet.  Quick meets a young man who attributes his recovery from an opioid addiction in part to Buffett’s principles of ethics and integrity, and profiles NFL superstar Ndamukong Suh, who has been mentored by Buffett as he pursues business interests he hopes will carry him beyond his pro football career.  CNBC cameras also follow Buffett to Washington D.C., as he visits the neighborhood where he lived as a teenager and got his entrepreneurial start delivering newspapers in the 1940’s.

 Posted by at 10:33 am
Apr 122018
 

I am quoted in the May 2018 issue of Kiplinger’s Personal Finance – “What Would Warren Do?”

“Still, at its current price, Teva would not be the bargain for you that it was for Buffett. Teva’s average price was roughly $14.50 a share during the fourth quarter, says David Kass, University of Maryland finance professor and longtime Buffett watcher. If you bought now, you’d pay more than 30% more than Buffett did.” 

 

 Posted by at 8:47 pm
Mar 262018
 

Berkshire Hathaway offered to sell its many year 30.8% stake in USG to privately held Knauf for $42 per share, representing a 25% premium over its closing price of $33.51 on March 23.

At Berkshire Hathaway’s 2017 annual meeting, Warren Buffett said:  “Berkshire has held equity in USG through two bankruptcies: asbestos and too much debt, because it was very cheap. Gypsum is a disappointing business.  Each time the business rebounds, management get too optimistic and they increase supply so that it exceeds demand. This was not a great idea.”

 Posted by at 8:26 am
Mar 032018
 

Warren Buffett was interviewed on CNBC on February 26, 2018 from 6:00 a.m. – 9:00 a.m ET., primarily to discuss his annual Letter to Shareholders that was released on February 24.

The highlights of this interview were:

(1) Berkshire Hathaway’s net worth increased by $65.3 billion in 2017, partially as a result of a $29 billion increase from the corporate tax changes of 2017.  Berkshire’s unrealized capital gains of about $100 billion will now be taxed at 21% rather than 35% when these securities are sold in the future (resulting in a saving of $14 billion).

(2) Tax reform provides a huge tailwind to businesses.  Berkshire’s future profits will be taxed at 21% instead of 35%.

(3) Starting in 2018, Berkshire will have to report unrealized capital gains (and losses) on its $170 billion common stock portfolio on its income statement instead of its balance sheet.  Therefore, net income will be further distorted (in addition to realized capital gains and valuations of derivatives).  Investors should focus on Berkshire’s operating earnings instead.

(4) At current interest rates, one should choose equities over bonds.

(5) Berkshire was a net buyer of equities over the past year.

(6) Berkshire has not recently acquired a large company because of the takeover premium (about 25%) that it would have to pay over very high current market prices.

(7) Buffett prefers to repurchase Berkshire’s shares rather than paying a cash dividend. He will currently buy back shares if they are selling for less than 120% of book value.  He may increase that threshold to 125% or 127% in the future.  If Berkshire pays a cash dividend there will be an implied promise to continue to pay a dividend every year.  (Berkshire currently sells for about 143% of book value.)

(8) Owning shares of Berkshire is like a having savings account.

(9) GE made many mistakes including “insurance reserving” for long term care insurance.

(10) With respect to Wells Fargo, Buffett has confidence in CEO Tim Sloan.  Wells Fargo had terrible incentives.

(11) He criticized using leverage to buy stock.  People who borrow risk what they have and need for what they do not need (“get rich quick vs. getting rich slowly”).

(12) He was wrong on IBM but he likes Apple.

(13) His effort with Jeff Bezos and Jamie Dimon with respect to health care is aimed at cutting costs without reducing quality.

(14) The airline industry is more competitive than railroads. “I would not rule out owning an airline”. Berkshire owns up to 10% of the four major airlines (American, Delta, Southwest, and United).

(15) The 10 year U.S. Treasury has recently gone from a yield of 2.4% to 2.9%.  However, businesses are earning a return on equity of 12%.

(16) Over time we want  more international trade.

(17) Buffett recommends the earned income tax credit (EITC).

(Note: This blog post has been published by ValueWalk.)

 Posted by at 10:28 pm
Feb 262018
 

I was interviewed on BNN TV (Business News Network – Canada) on February 26, 2018 at 8:40 a.m. ET on Warren Buffett’s Letter To Shareholders.

Highlights of my interview:

(1) Warren Buffett has not made a major purchase recently because stocks are near all-time highs and he would have to pay a 25% premium over current market prices to acquire a company.  He will pay only a “sensible purchase price”.  Berkshire has $116 billion in cash and Buffett will participate in only friendly deals.  However, Berkshire has been a net buyer of common stocks over the past year.

(2) At current interest rates, Warren Buffett thinks stocks are more attractive than bonds.  Buffett is optimistic and expects stocks to rally over the next 1 – 2 years.  But if the market should decline, then he is prepared to pounce and acquire a whole company or more.

(3) Warren Buffett and Charlie Munger are in charge of allocating capital and they (primarily Buffett) will decide on major purchases.  Buffett’s portfolio managers, Todd Combs and Ted Weschler, manage part of Berkshire’s common stock portfolio.

(4) In the near future, Berkshire could once again go partners with 3G Capital of Brazil in acquiring another food company such as their joint effort with H.J.Heinz (2013) and then Kraft (2015) (now Kraft Heinz).  Berkshire has been the financing partner and 3G Capital the operating partner.  Since Berkshire’s last large acquisition was Precision Castparts (aircraft parts manufacturer) which closed in January 2016, Buffett might acquire another manufacturing company, or an electric utility, or another business in the same industries as its current 60 businesses are in.  He will look for a well run business, with good growth prospects, at a sensible purchase price.

 

 Posted by at 11:35 am
Feb 242018
 

Berkshire Hathaway released Warren Buffett’s 2017 Letter to Shareholders at 8:00 a.m. today.

The highlights were:

(1) Berkshire’s $65 billion gain in net worth or book value in 2017 resulted from a $36 billion gain from operations and a $29 billion gain from the cut in corporate income taxes in December.  As a result, Berkshire’s price to book value currently equals 1.44.  (Berkshire class A shares closed at $304,020 on Friday, February 23 and its book value equals $211,750 per share.)   Buffett has previously said he would buy back shares if this ratio was below 1.20.
(2) As a result of new accounting rules going into effect in 2018, Berkshire would have to report changes in the market value (unrealized gains and losses) of its $170 billion stock portfolio every quarter as part of its net income. Buffett argues this will only introduce more confusion.  Instead investors should look only at changes in operating income.
(3) There are four building blocks to add value to Berkshire: –1. large stand alone acquisitions,  — 2 bolt-on acquisitions — 3. internal growth and –4. investment earnings from stock and bond portfolio.  With respect to acquisitions, Berkshire will make a large purchase only at “a sensible purchase price”..  Since stocks are at all-time highs, Berkshire will be patient and wait for a future buying opportunity at more attractive prices..
(4) Acquisitions that were made in 2017 include Pilot Flying J, and bolt-ons including real estate brokerages, and an addition to Precision Castparts.
(5) Buffett discussed how insurance is the engine that has powered Berkshire’s growth and the role of float (premiums that are invested before claims need to be paid).
(6) Non-insurance business delivered $20 billion in pre-tax income in 2017 vs. about 19 billion in 2016 — an increase of about 5%. The largest businesses being BNSF (railroad) and Berkshire Hathaway Energy. Other large businesses include Clayton Homes, International Metalworking Companies, Lubrizol, Marmon, and Precision Castparts whose earnings were approximately unchanged from 2016.
(7) Berkshire’s cash position increased to $116 billion (cash and Treasury Bills) at year end 2017, an increase of about $30 billion or 35% from $86 billion in 2016.
(8) Berkshire’s 5 largest common stock positions were:  Wells Fargo, Apple, Bank of America, Coca-Cola and American Express.(not counting Kraft Heinz — Berkshire is part of a control group  — therefore, Berkshire must account for this investment on the “equity” method.
(9) Portfolio managers Todd Combs and Ted Weschler each manage $12 billion (up from $10 billion last year).
(10) Buffett provides an extensive discussion of how his $1 million bet (for charity) in a passive low-cost S&P 500 fund outperformed hedge funds (with average fees of 2 1/2% of assets over a ten year period).
(11) At current interest rates stocks are less risky than bonds, especially over long time horizons.  Bonds yielding 1% are selling for 100 times earnings (vs. 20 times earnings for stocks with growth potential).
(12) Finally, Buffett mentions the promotions of Ajit Jain and Greg Abel to Berkshire’s board and the titles of Vice Chairman.. There was no discussion of succession plans.

(Note:  This blog post has been published by Investing.com and ValueWalk.)

 

 Posted by at 10:38 am
Feb 232018
 

I am quoted in a Wall Street Journal article: “Playing With $100 Billion, Warren Buffett Is Giant Trader of U.S. Treasury Bills”.

“He’s aware that [Berkshire’s cash] is not earning a high rate of return for shareholders,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business and a Berkshire shareholder. “Paying out a special cash dividend, a one-time dividend at the discretion of management, makes some sense.”

 Posted by at 6:55 am
Feb 222018
 

I am quoted in this CNBC article: “Warren Buffett’s partner Charlie Munger reveals how much of an impact luck has on success”.

Fellow Omaha-native Buffett has also touted the critical role luck has played in his life and told MBA students at the University of Maryland in 2013 that winning the “ovarian lottery” helped determine his success.

“Warren Buffett has stressed the importance of luck in his life, focusing not only on where he was born but also when,” David Kass, a clinical professor of finance for the Robert H. Smith School of Business at the University of Maryland, told CNBC last year.

 Posted by at 6:30 pm