Goldman Sachs: Buffett's the Milkman and He Always Delivers

I don't know if I've told readers this before....(ok maybe almost a hundred times)....but I love dividends. 

In a market such as this, where volatility rules the day, dividends are the solstice in my investing activities that reminds me why I enjoy being paid to wait. Even if the market drops 20%, I'm not nearly as exposed to losses as indexed investors when my portfolio yields a hefty 4% of tax efficient dividends. Not only that but my tax-efficient cashflow is growing anywhere between 5-8% per year at a minimum and in depressed markets I'm simply adding to already undervalued shares with the prospects of a stress-free retirement with unlimited possibilities to keep me occupied.

Warren Buffett knows the value of cashflow, both personal and corporate. In the news yesterday, Goldman Sachs (GS) announced that Berkshire Hathaway (BRK.A), Buffett's investing vehicle, will purchase $5B worth of perpetual preferred shares with a 10% dividend being paid in return for exclusive use of this capital injection. Not only does Berkshire get a dividend nearly double that of Canadian bank issued perpetuals, but the holding company also receives warrants to purchase $5B of common stock at $115 during the next five years.

This effectively sets a floor price on the common stock of GS and gives them a much needed credibility boost in a market of much uncertainty. Buffett has already established a comfortable margin of safety in his investment even if the warrants are never exercised. With extensive experience in unwinding derivative positions in General Re Securities back in 2002, Buffett is likely to begin exerting significant pressure on Goldman management behind closed doors right away to limit its exposure to "toxic waste."

If Goldman balks at the move, the market will likely see Buffett exercising the warrants on the common in a move to send a clear message to both the market & company that he means business.

Buffett doesn't invest with any intention of losing money and he's given Goldman Sachs a rare opportunity to clean up their act with a vote of confidence from an investor revered as the best in the world. He buys for the long-term and has learned from past mistakes to take opportunities he can create in his favor to better position Berkshire for the future.

The Oracle of Omaha has been busy buying in recent days and weeks, and I find comfort in this behavior as I myself have seen these market troubles as opportunities to buy quality companies at much cheaper valuations than I would have otherwise expected.

Scott asked me earlier this morning, "Who better to navigate this minefield than Warren and Charlie?" and an investor has to wonder if we're better off simply buying Berkshire B shares (BRK.B) at this time of market uncertainty than attempting to navigate the cluttered minefield of exposed companies on our own.

As a keen student of Buffett and other value investors I've learnt a great deal that starts with the basic foundation of how to be successful when investing. I follow my Value Rules, buy quality companies that pay me a dividend and when I have an adequate margin of safety I buy some more. I might not always get the cheapest price than other investors, but over the long-term I believe I'm much better off buying a company that pays me every quarter to invest in their business. Over time I can reinvest those dividends into more shares of the same company or others and accelerate the compounding nature of my investments for the long-term.

Here's one thought for readers: Buffett's the milkman and he never forgets to deliver.

Disclosure: I hold shares in Goldman Sachs (GS)

Comments

[Lockstep In...:]

What? Are you nuts? "This sets a floor price on the common stock" No it does not. It is just a call option if GS survives this mess intact or gets bought out by someone who wants to retire the debt. But if this sex change (read: business model change) does not work out as planned, GS stock will continue to decline and the warrant is worthless but the dividends keep paying to the end. Warren is still taking risk and GS still has significant downside risk.

2008 Sep 24 11:40 AM

[Dividend Gr...:]

Well, the dividends will keep paying to BRK.A untill the US gvt decides to nationalize GS as well :-)

2008 Sep 24 11:53 AM

[jcrash:]

What he got and what you own aren't even related.

Given the cost of that capital, I would expect a serious decline in share price over time.

2008 Sep 24 11:59 AM

[Brad Ferris:]

I don't see GS stock declining from here for a number of reasons. They have incredible intellectual capital despite the problems that the industry is facing at this time. Do they have massive exposure? Yep. Will they look to decrease that exposure promptly? Yep.

If the warrants are worthless than why on earth would Buffett had demanded them? GS didn't simply say, "Hey WEB....here are some warrants we're throwing in for free." This was part of the package that BRK offered and likely wasn't something negotiable. BRK is getting a dividend which is accounted for in the MoS calculated for the transaction. Buffett buys for the long-term and isn't concerned with making a quick buck.

While there's risk in any investment my belief is that Buffett again will come out in the end just fine. He is taking substantially less risk than other individuals (say SWF's) when they've placed large equity injections into companies and the long-term downside risk to GS is much less, IMO, than many of the other banking institutions in the US.

2008 Sep 24 12:56 PM

[hooligan:]

ha ha! you mean you can't all see the "new leveragedproduct" its called, propaganda! every one rally round the flag, cos sure as hell if you don't then the truth will out! the money mechanism is broken, so it doesn't matter how much money you make..you either can;t eat it in your lifetime or eat it, full stop! the way to make money is now..park it in TIIPS, for five years, and have a peek over the trenches in 2013, maybe the hadron particle accelerator won't have created a black hole. Seriously..if you think that the treasury market is so smart that pumping 7-10% of gdp into the money supply is worth TEN YEAR implied inflation of just 2% (starting from 5%!!!!!) you have rocks in your head

2008 Sep 24 05:15 PM

[icandoitdon:]

"This effectively sets a floor price on the common stock of GS"

this is nonsense. buffet is a world apart from a GS shareholder. he owns preferred with a huge dividend payout. he put a gun to the head of that company and they caved because they were desperate for capital and nobody else would provide it. good for buffet but not so good for GS.

i'd also point out that our "world's greatest inverstor" admitted he wouldn't have done this deal absent a backstop from the taxpayer. you're welcome, warren.

way to go, warren...

2008 Sep 24 08:12 PM

[provencapital:]

And by the way, Berkshire B shares do not pay a dividend that you 'love'.

2008 Sep 25 12:12 PM

[Dividend Gr...:]

Proven capital,

He never stated that BRK.B paid dividends. It would be nice if it did however..

2008 Sep 25 02:38 PM

[Dave G:]

Here's another play if you believe that interest rates will sooner or later go up. GS has issues floaters that currently yield more than 7.5% with dividends that rise as LIBOR goes up. Warren's cash and GS delvering has made these bullet proof, in my opinion. Symbols are GS-D and GS-A. Common dividend must be cut first before these will be cut; also the gubment is removing risk as well with their bailout. Point being there are so few ways to profit fro a rise in interest rates. This is one.

2008 Sep 25 05:34 PM