Safraner Investment

Long only, value
Safraner Investment
Long only, value
Contributor since: 2013
Thanks DM, good arguments and well written
Santander dividend slashed as it goes back to cash dividends
In case it helps, I wrote an article about Russian gas in Europe touching on the LNG alternative here:
Fair comment, the recent investments in Peru seem material for Enagas and I agree with the risks associated to international diversification (not only potential poor investments but also currency or country risks). Just to add some detail, Gasoducto Sur Peruano is on take or pay terms, making revenue more stable (I assume then it meets the expectations of the company). Also while Enagas is holding a minority stake, Odebrecht has operated in Peru for long years.
As for this year's advance, IMO the company was undervalued as the year started and has only caught up to more reasonable prices, especially after the regulatory risk in its home country has been mitigated.
Interesting article, in fact a number of stocks show linear dividend growth which smooths down their % growth rate a they move into the future.
In the article below I discussed a simple formula to calculate the value of dividends under the assumption of future linear growth. Hope you will find it useful.
SA: How to value dividends that grow by a fixed amount each year
Thanks for your comment, these are material fields that may supply Europe most likely with LNG, so it would have been relevant to mention them given their proximity to Europe.
Interested investors can find additional information here:
My article did not comment all the potential LNG supply options (any country with supplies could in theory export to Europe) but I believe they all share common traits: inelastic supply, high price (especially in Asia) and the need of a receiving infrastructure in Europe. Spain and the UK are top of the list in infrastructure but none imports from Russia. They could however distribute to the rest of Europe if interconnection bottlenecks across countries are eased.
Thanks cfarbstein. I used an 8% discount and now corrected the article to mention this.
I typically use 8% to 10% discounts for simplicity (consider it my personal choice of return, I consider AT&T a low-risk investment at 8%).
From a theoretical CAPM point of view however the discount rate should be:
r = Risk-Free rate of return + Beta * Equity Market Premium
In practice, the values of risk-free rate and market premium can be very debated, but as an example for AT&T you can visit Their analysis comes up with a 7.82% discount (not far from my quick assumption).
I normally face issues when inserting links in comments, but here is the full link in case it works:
Yes this is an old and well established formula (see wikipedia: dividend discount model) I would suggest you get familiar with the standard DDM - the web has plenty of information about it- and specially its limitations.
This article follows the same logic of the standard model but addresses linear dividend growth instead of exponential growth as the standard DDM does. As a variation of the standard method, the proposed model also inherits all the limitations the DDM suffers.
Many thanks loon, I guess this fell through the cracks out of my text in the process of editing but you are right, I chose an 8% discount rate for the example (different investors will choose different values, but this is quite a common one for a quick calculation).
I'll send an ammendment to the article and include the 8% reference
Yes, I thought the same after writing them ;-)
Jon, in a deep sense, my view is that prices do compound.
Let me explain myself: companies add their undistributed earnings to their balance sheets in order to generate even higher earnings. That is exactly the same thing you do with your dividends when you talk about compounding.
The first sort of compounding (company-driven rather than shareholder-driven) is what allows earnings to grow. And in the long term, prices will follow earnings. That is why I see the compounding math happening all the same (only behind the scences).
Thanks Briar, great post in my opinion. Nearly an article itself.
Geekette, what my article tries to explain is that when you receive a dividend what you are in fact doing is selling a portion of your company (and that is the reason why you are receiving cash, it comes in exchange of that sale).
Let me try to explain myself one more time. When a dividend is paid, shareholders are not forced to sell stock, agreed, but the company is in fact forced to sell assets (or to not purchase additional assets, which is the same) in order to have cash ready and distribute those dividends.
So in my view you have two options to receive cash from your investment in a company: the first one is to let the company sell assets in order to pay you a dividend and the second one is to let the company keep all the cash in-house and invest it for you (but then you need to sell a portion of your stock to generate cash for yourself)
In both cases, when cash appears in your bank account, it is because you have sold something (either directly through a stock sale or indirectly through the company selling its balance sheet).
Just let me insist once again that I do not mean with this that dividends are a bad idea. If you need cash from your investment then it is mostly a question of choice or preference whether to sell portions of the company directly (by selling stock) or indirectly (by receiving dividends). In fact I personally prefer dividends.
I'm quite beginning to believe so
Sorry Bangalla, I must have not have expressed myself correctly. Your premise must be correct.
Thank you spielerman, I find you made very good points indeed
Thanks Fred, much appreciated
Thanks for your comments Bangalla.
You are right. Dividends impose a cash diet on management which mitigates the possibility of terrible investments. But it works both ways: Dividends also impose a cash diet on management which mitigates the possibility of profitable investments.
In the end, dividends transfer the investment decision from the company to the shareholder (it is important to note you are not richer in the process, before you owne cash that was sitting in the company and now you own cash that is sitting in your bank account).
If you believe you will reinvest cash better than the company, then better take the dividend and reinvest it yourself. Otherwise, better let them put that cash to work for you.
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Pole, it is good having you call this 101 while many others scream it is utterly wrong
I side with to your opinion, no rocket science here, but still many investors seem to get confused by the fact that a dividend doesn't make them richer than they were before it. That is why I belive my last two articles might help some investors with a focus on dividends gain a better insight on what dividends are / are not (I am not sure how succesful I might have been in this sense, so it may be good to starta an opinion poll).
I see nothing bad in articles with an educational bias, but don't worry, there is not a third in makings.
I agree it makes sense for many companies to distribute dividends if they have no better use for cash. That is fine, but such distribution is only that, a distribution - as opposed to a creation - of value. Some may be confused by that tricky difference.
I also believe double taxation is painful, but I am afraid I'm not ready to form a solid opinion on this - sorry I just don't have enough knowledge of tax system implications.
Regarding penalizing corporations which hold cash, shouldn't individuals be penalized with the same logic? I understand your proposal as an attempt to make the economy move, which is much needed, but I am not sure of what other consequences it might have. E.g. Penalizing cash might incentivise companies (or individuals) to misuse it instead. Not sure where that would lead us to.
AP, in my post I only say that I value $1 of cash on hand as much as $1 of cash in a company balance sheet. I would never buy $1 for more than $1 and don't expect others would sell it to me for less. Yes for cash assets I am appealing to rationality even if I agree it is not abundant.
However assets other than cash, as you say, can be priced above or below book value. That can be explained because book value is only the result of accounting rules (which in fact are only a convention that can change over time) and because even if accounting was reflecting "true value" (whatever that means), the market could still price assets irrationally (the efficient market axiom is only that, an axiom, a hypothesis).
In the example in my article all assets are valued at book value only for simplicity reasons. The math would work the same if we used other multiples, but as you can see from the numerous posts, it is hard enough to make my point even with that simplification.
I beg you refrain from ad hominem arguments once again
They are irrelevant to the discussion
My article is not suggesting that dividend payers cannot appreciate. They do and will keep doing so as long as earnings keep growing. Neither do I argue that DGI is wrong - again: I love dividends.
But this does not mean dividends come for free. The point my article tries to share is that, whatever the current price appreciation of a dividend payer is today, it would in fact have been higher had it not distributed dividends. In my opinion it is important for fellow investors - and particularly for dividend investors - to understand this basic subtlety.
Now some call this exercise academic or directly abhor "Greek symbols". If you prefer, let's try to reduce it to old farmer's wisdom: a pregnant cow will sell in the market for more than the same cow after giving birth. Companies pregnant with cash are no different.
Eppur si muove...
WmHilger1, I don't seem very successful in making my point understood, but let me try a last though-provoking example before you dismiss the whole idea.
Let's assume for a moment that this is NOT a zero-sum situation, so dividends do in fact make shareholders richer but do not come at all at a cost on share prices (at least not a permanent one, except for temporary blips).
So then a mental experiment: let's pick up a phone, call all present and past shareholders of KO and ask them to refund the company with all the cash dividends they have received in the last 100 years.
I am sure we both agree that this will make shareholders poorer in terms of cash because we are reversing the previous payments that made them cash-rich.
But my article also argues that a permanent (not temporary) shift in KO share price would take place after receiving such a huge pile of cash and as long as that huge pile of cash stood in its balance sheet.
Honestly (and candidly!): do you really believe the price of KO would not move up in such a situation or only do so temporarily? And if you do believe that the price would move up after injecting such a huge pile of cash in the company, isn't it the same to say it has moved down because the company distributed those dividends in the past?
All clear, thanks.
Agree with the second item, dividends anticipate your tax payments, not good from a time value of money perspective.
I can't see an issue though in the wholesale vs. retail price argument, but that is probably because I always value company cash at book value (with only non-cash assets receiving higher or lower multiples). So when I receive a $1 dividend, a 1x $1cash in the balance sheet is being paid to me. When I reinvest it, I am buying something different (non-cash assets or a mix of cash and non-cash) and no loss appears to happen in my numbers by paying higher multiples for that different object.
I see what you mean though, but I guess I could only test this logic on a company whose balance sheet consisted purely on cash (not a real world company I guess). Not saying that it would not happen, but I would be intrigued to find out that if we take a simple bank account with $1,000 and just put it under the name of Warren Buffet, the market would be ready to pay say $3,000 for it, even before Mr Buffet had done anything with it. Mr Buffet would then have a huge arbitrage power if that was the case and he could make a fortune just by selling $1,000 notes for $3,000 even before touching them.
Thanks for this good post Briar. I just read your previous article to better understand your points.
True I use "compounding" only to refer to what shareholders (and not companies) can do with cash. Just consider it a "licentia poetica" if you wish.
As for the wholesale vs. retail price argument I'm not sure I follow. You seem to suggest - sorry if I missunderstand it- that if a company trades at 3x times book value then $1 cash in its balance sheet is priced at $3 but, when distributed, pays only $1 instead of $3. If this is what you mean - and apologies again if I got it wrong- I would say that $1 cash in the balance sheet is always priced at book value (a dollar is a dollar is a...). Consequently, the market must be pricing the rest of the assets strictly above 3x, so that the resulting total multiple is exactly 3x. Would that solve the wholesale vs. retail paradox or am I getting it wrong?
As for the zero-base tax argument, I agree dividends are fully taxed but - as pointed above- they also trigger a capital loss (or reduced gain) through the share price reduction, so they effectively give shareholders a tax shield on their capital gains that offsets the zero-base dividend penalty. Once this is taken into account, in my view the tax impact would be neutral (always depending of course on which tax rules a shareholder is operating under - don't take me into that jungle please).
Thanks Fred, appreciated.
I'll paste the link again below. In case it keeps failing, you should be able to find the article by googling "Do Dividends Really Matter? The University of Chicago Booth Selected Paper No. 57".
Here it goes again. Hope you enjoy it as much as I did.