Geordy Wang

Geordy Wang
Contributor since: 2011
Hi poortorich:
Yes, I'm still bullish on Apple's prospects, but I was never one of the ones who believed that the company could maintain its breakneck growth rate forever. Honestly, the argument that people are making now about how Apple needs to deploy its cash more efficiently is the same argument I made in one of my first articles almost two years ago, but of course it was much less well received back then. Apple was never my largest position, but I did, and still do expect it to outperform the index going forward, which is why it's still in my portfolio.
rich:
Yup, I do believe that Apple is a great company selling below its intrinsic value, which is why I'm still long the stock (it totally pisses me off that SA moved the disclosure to the top which ruins my surprise ending, though it's not much of a surprise for anyone who has been following my articles!). What I don't believe is that it's the kind of safe, stable investment with predictable yearly returns that many people are making it out to be. The considerable upside is accompanied by a considerable downside. Anyway, we all have our own criteria for what constitutes a good requirement stock, so take what I wrote with a grain of salt. As I said, I'm still optimistic about the company's prospects, it's just a stock you need to keep an eye on. :)
And regarding subsidies: the US is definitely the most prevalent, but it's far from the only one. A lot of other countries are a bit more transparent about how they break down your bill though. For instance, when I went to Australia last year, they break down your plan into a monthly service cost and a monthly cell phone cost depending on what phone you choose, so you know exactly what you're paying for your phone.
Sure, I don't have any reason not to expect another special dividend this year, though I wouldn't really be disappointed if it doesn't come since it'll probably mean lucrative investment opportunities are opening up in the apparel industry again.
Since this article popped up in the dividends section of the site, I want use this space to note that Buckle has been paying out almost all of its free cash flow in the form of a massive special dividend over the past few years. It wasn't the main focus of the article, but it's definitely a relevant part of this story, and other articles about the stock go into more detail for those interested in this aspect of the company.
Hi Alpha:
Some may see that as a negative, but I honestly don't. With age comes experience, after all, and it's not like the company is run by a bunch of octogenarians (of course, I own Berkshire Hathaway so I wouldn't care if it was!). The CEO barely cleared 60, and most of the higher level executives are in their 40s and 50s.
DGM: The problem with that approach is that it doesn't take into account the time frame in which the new capital is injected. For example, if you calculate your return at the end of every calendar year, capital that's been added in December should be weighted differently than capital that's been added in January.
The easiest way I've found to do what you're describing is to use the built-in XIRR function in Excel, which is so simple to execute that no prior knowledge of spreadsheets is necessary (which is good for me because otherwise I wouldn't be able to do it!). You just punch in values for initial capital, capital additions/subtractions, current portfolio value, and dates, and it spits out the annual growth rate for you. You can find a bunch of guides on how to set it up, but here's one: http://bit.ly/OfyjiB
davel: Past performance of a stock has no bearing on whether or not I will continue to hold (after all, selling would've turned those paper gains into actual gains). However, I believed that at this moment in time, initiating a dividend is the right move for Apple from a capital management perspective. I require my companies to have financial discipline as well as operational excellence, and if Apple failed to pay a dividend, it would not have fulfilled that former criterion in my eyes, hence I would've sold.
Edit: Also, what Lex said. :)
Editors have been notified of the error. Thanks, binary, for pointing it out (and Counterpoint for sticking up for me!).
Good read, Felix, though I disagree with your ultimate conclusion. Venture capital support is necessary for small, innovative start-ups with a revolutionary product to move fast enough to stake out their claim in the market before an incumbent steals their ideas. Without being able to benefit from the turbo boost of a venture capital injection, it'll be almost impossible for a small company to overcome the larger financial resources and economies of scale of bigger companies. We'll all be using Google+ instead of Facebook, because Facebook wouldn't have established the momentum, user base, and developer support it needed to secure its business by the time Google entered the game. When you have the same old benemoths dominating the market because smaller companies don't stand a chance, you end up with a stagnant economy. Angel investments give smaller companies that chance.
Great to hear from a long-time reader, Alpha! Thanks for the kind words. :)
rubicon is right, the effective repatriation tax isn't going to be the 35% number that's so frequently thrown around, taxes paid to foreign governments can be claimed for credit and most certainly aren't 0%. The government knows that hundreds of billions of dollars cash returned home is just what the doctor ordered for the economy, but they also don't want to give up their massive potential tax windfall. What we have here is a classic standoff. It'll be interesting to see who blinks first.
sld: Mathematically it makes no difference to Apple's intrinsic value, but I understand that the stock's high price per share presents a significant psychological barrier to less savvy investors. I doubt the combined purchasing power of these investors is enough to move the market, but more demand for what you own never hurts, so I certainly won't complain if Apple decides to split its stock (after all, it's done it before). But it's no big deal if it doesn't, there are a lot of more significant factors at play.
Robert: You know, this is exactly how I explained it to my father just yesterday. He's been a real estate investor his entire life, only having gotten into stocks recently, so he still associates return exclusively with capital gains. When I explained to him how he can sell a house, invest the proceeds into a diversified portfolio of dividend paying equities, and generate an income stream that easily matches his rental income, is almost certain to grow faster over time, and isn't subject to frictional costs like property tax, insurance, or repair costs, it's like a lightbulb went on in his head.
I think the S&P was historically a much better proxy for dividend stocks than it is now. After all, the average yield of the index ranged from 3-5% for most of the century, it isn't until recently that it has dropped to the 1-2% range. Back in the old days, paying a dividend wasn't considered a privilege, it was a shareholder right to share in his company's profits. The rise of technology stocks changed that, but I'm willing to bet that as the current generation of tech companes mature, there will be a secular return to the old ways. Just Apple and Google initiating a dividend will by itself bring the yield of the S&P much closer to 3% than it is now.
Makoto: The hypothetical example you cited is exactly the same as retailinvestor's, so my response will essentially be similar. You cannot ignore reinvestment of dividends when you're doing a stock to stock comparison. Doing so creates the very effect you tried to avoid in the first place: it skews the data. You cannot expect to compare two companies when you're drawing down on the assets of one more than the other. Imagine if you had reinvested all dividends for both stocks in your scenario: due to reinvestment, MCY will have a slightly higher YOC than PEP,, showing that it was indeed the superior investment.
I mentioned in the article that YOC is useful for those who don't reinvest dividends, and in many cases it is, but this isn't one of them, not when you're matching two equities against each other.
building: I've followed your comments with interest on several past articles, and have always found them to be enlightening and thought-provoking. I hope you will continue sharing your thoughts here on SA.
Ed: I'll let others who follow these stocks more closely pitch in (though I'm a big fan of MCD), but a low yield is like a high P/E. It's only acceptable if outsized growth can be expected. Everyone has their own threshold, which is very frequently based on how many years you have before you need to spend that income stream, so you should figure out what works for you.
retail: XYZ and ABC would be the same given the following assumptions: 1) dividends were reinvested for XYZ (otherwise your cost basis would have to be reduced by the dividends in order to make a meaningful comparison), and 2) the current yield for both stocks can be expected to grow at a reasonable rate over time. Your point is valid, YOC is useless for stocks that pay erratic distributions or rely on special dividends, but that's generally not how income investors invest.
Larry: Both roads lead to the same place. You can examine your progress by comparing original yield vs current YOC, or by breaking it down into a compounded annual dividend growth rate. Check out any of the available CAGR calculators on the web, they all require three pieces of information: present value, future value, and time. In the case of the dividend investor, present value would be original yield, future value would be YOC, and time would be however long ago you purchased the stock. On the other side of the equation would be the number you're talking about, the dividend growth rate. They're two sides of the same coin.
samithree:
The Buffett/Munger team has always recognized the power of proper incentive compensation to squeeze as much performance as possible out of Berkshire managers. Retained earnings must generate an acceptable return on equity, etc. The system that's been working so well is going to remain in place when Buffett retires. Regarding investments specifically, Buffett said that his investment managers will be compensated based on performance on a rolling 5 year basis against the S&P, giving them a considerable advantage over the typical Wall Street fund manager who's up for review every year. Berkshire's emphasis on long term investing will remain intact.
Thanks for an excellent point, Ravi, you're absolutely correct. If Berkshire meets Buffett's own performance goals, then investors would indeed be better served than if left to their own devices. The question then becomes whether or not you believe those goals are realistic, and can be met not only by Buffett, but by his successors as well.
Hi closedendtrader,
1) I don't believe so, though I'm no accountant so I could be wrong.
2) I wouldn't count on it, especially since Buffett just hired two new investment managers. Plus the part of Berkshire's portfolio that's insurance float can't be spun off anyway because of the associated liabilities.
Hi Colin,
Given that a full third of Berkshire's book value is held in its equity portfolio and that its insurance arm is still its largest segment, I wouldn't bank on that happening any time soon. I would say maybe ten years at the earliest, and that's only if Buffett goes on extremely aggressive acquisition mode. Either way, the performance of Berkshire's portfolio wouldn't be something that this generation of Berkshire investors should write off. Cheers!
Hi jrepasch:
When we're looking at trailing data, the best investment is always the one that would've made you the most money. If you made more money in Chevron and Kraft than you did in Berkshire, then selling Berkshire was definitely the correct choice: after all, if you had held on, the value of your portfolio would be lower right now.
However, at the present moment we don't care about past performance. Any money that was made was already made, and any money that was lost was already lost. We want to invest in the companies that will deliver the best results moving forward. Very often that means the same stocks that haven't gone anywhere in the past few years.
For example, even though Berkshire's per share price remained fairly constant since 2007, its intrinsic value continued to go up, to the point where its operating earnings today, in a depressed economy, is roughly the same as it was back then, at the height of an economic boom. Berkshire was not a good investment opportunity five years ago. Is it a good one today? I own it in my portfolio, so clearly I believe so (I bought in last year at around $72). The only way to know for sure is to wait another five years. :)
Rich:
I do have a few ideas for future articles that'll go more into my own stock selection process, stuff I look for, stuff I avoid, etc. Broad, strategically-oriented articles like this one have their place, especially for newer investors, but it's good to balance them out with grounded, actionable pieces as well. I hope you'll be there to read and comment. Thank you, and everyone else for your kind words! :)
Funny you should mention Apple. I actually own some Apple right now, though I appear to be one of the exceedingly rare longs who believe that the company can, should, and will pay a dividend. If I'm wrong and Apple doesn't announce a dividend within the next year, then it's time to book profits and sell.
Stephen:
That blurb is just legalese. Notice how they cover everything, from cash to investments to operating income to, yes, debt. You have to look at the actual numbers, nothing in what you quoted indicates that KO finances its dividend with debt.
You know, this is one of the best articles I've read on SA, and it's a shame because it probably won't get very many page hits due to the lack of ticker symbols. The author is absolutely right in presenting a point that I've rarely seen discussed anywhere else: that actively managed and index funds exist in a sort of symbiotic relationship. One can't function without the other one. Those who buy index funds need active fund managers to do all the research and set fair market prices so they can freeload off that work, and active fund managers need the indexers to introduce an element of inefficiency into the market, which makes it easier to outperform with active stockpicking. That's why there won't ever come a time when the stock market shifts to 100% index funds or 100% managed funds. In the long run, the ratio will balance itself out through natural market forces.
Thanks for a great read, Mr. Smead.
Wait, what? KO's operating cash flow was roughly $9 billion last year. Assuming $2 billion was domestic, that leaves $7 billion generated overseas. According to your research, their undistributed foreign earnings increased by less than $3 billion year over year, which would seem to indicate that the majority was repatriated to pay the dividend, and that it was not primarily financed by debt.
There's no need to worry about KO's dividend.
Glad to see SA's regular content supplemented by such fantastic exclusives. Keep up the good work!
I mentioned the necessity to account for dividend reinvestment in the article somewhere, but not extensively, so thanks Mage! It's definitely important enough to be worth repeating. Unfortunately, Yahoo doesn't automatically track dividends for you, so you'll have to enter them in manually in both your tracking portfolio and your benchmark portfolio after every quarter. Despite its shortcomings, Yahoo offers the best free tools for creating a virtual portfolio that I've seen - if anyone knows a better one, I would love to hear about it!