Introduction:
I like old cars. I like to fix them up, drive them for a while and then, if the price is right, I sell them. A car that I've owned for a while is a red 1963 Corvette. It was a real project when I bought it, but with a labor of love and a lot of money, the car that was an "ugly duckling" became a "swan."
As I approach retirement, to make my life a little less complicated, I've decided to sell some of my "toys." Here is a dilemma that many people in my situation have to face up to. While this particular toy was a relatively inexpensive initial purchase for me, the work to get it into its current shape was not cheap. So, putting a value on the car is somewhat difficult.
On one hand, I could think to myself, "I have a lot of money invested in this car, so it has to sell at a price that is relative to the amount of the investment that I've made in the vehicle and some profit over and above that number, in order for me to be happy."
On the other hand, reality rears its ugly head and it tells me, "Dave, this car is only worth what someone else is willing to pay for it." Perhaps selling the car would result in my taking a loss on my investment or at best, just breaking even on the investment made. Reality can be a real pain in the rear end.
Some Thoughts:
Not to long ago, Warren Buffett decided that he wanted to own the H.J. Heinz Company (HJZ). Now, this decision did not come out of the blue for Buffett. I am sure that he and his staff did a lot of investigation into the value of HJZ before he presented an offer to the company.
How Buffett Got Involved:
The plans to take Heinz private apparently began to take shape on a plane in early December. In an interview with CNBC, Buffett said he was approached at that time by Jorge Lemann, a fellow billionaire and a co-founder of 3G. The two had known each other since serving on the board of Gillette about 12 years ago.
Soon after that encounter, two of 3G's managing partners traveled to Pittsburgh to have lunch with Heinz CEO William Johnson and raise the prospect of buying the 144-year-old company.
"The offer was such that I simply felt compelled to take it to my board," Johnson said at a news conference Thursday. Over the next several weeks, Johnson said, the board worked out details of the transaction. (source: http://tinyurl.com/ool8ono)
Did Buffett Get A Bargain?
The company, 3G ended up purchasing HJZ for 23.3 billion dollars, which was $72.50 a share for the stock. Now, HJZ also carried some debt, which 3G decided to purchase, pushing the real number to 28 billion dollars. However, the deal was a 20% premium to where the market had priced HJZ stock the day before the announcement.
Did Buffett get a good deal or did he overpay for the company? That's a good question. On one hand, Buffett and his partner were very excited about purchasing the company for 23.3 billion dollars, based on comments that he has made.
On the other hand, the Heinz Board of Directors seem to have been very excited about Buffett's offer, considering that the Board unanimously approved the deal.
In the last fiscal year of operation, Heinz had revenues of 11.65 billion dollars and earnings of 923.3 million dollars.
But We Have A Dilemma:
H.J. Heinz was a company that paid a dividend. To a Dividend Growth Investor, HNZ was a company that had a long history of paying dividends. It had been increasing those dividends for the last 9 years, thus earning it a place on the Dividend Challenger list.
But there are many investors who see dividends as a practice that dilutes the value of a company. They would argue that every $1 paid in dividends, reduces the value of the company by that same amount.
But, I think you have to look at things from a more "real world" perspective. For me, owning HNZ stock with a cost basis of $36.46 a share (having purchased the stock in 2009), the price I received of $72.50 quite a bonus for me. Additionally, the dividends I received also added to the performance of my holdings. Those were almost an additional $4000 over the holding period.
Am I upset that Buffett did not "pay more" for Heinz? I could be, but it seems that everyone involved ended up "fat and happy." Buffett is happy, the Heinz Board of Directors is happy, and as a previous shareholder, I'm happy.
Some Final Thoughts:
As a DGI, I purchase stocks that are priced at a value to intrinsic worth. Now, again, one man's opinion is just that. An opinion. I like to purchase companies that have a history of paying and increasing dividends (hopefully at a rate that is greater than inflation). I like companies that have the earnings necessary to continue paying and increasing those dividends.
My goal is simple. I am looking to create a stream of income to supplement my retirement years. I want that income to be growing every year, since I think that things will continue to become more expensive in the future.
I've accomplished that goal with the active management of my stock portfolio, since I began doing this in 1984. Some stocks in my portfolio have performed better than others, in terms of "total returns." That's going to happen in every portfolio.
However as a group of holdings in the portfolio, dividend income has been growing at a 6-10% annualized rate, based on the stocks held in the portfolio at any given time. Remember, being an actively managed portfolio, there are companies that come and go, based on changes to the fundamentals. It is constantly evolving and while active management might not be for everyone, I find it particularly attractive.
About the Corvette. A couple of people came by to look her over and take her for a test drive. The good news is that she has found a new home and is being enjoyed by her new owners. The price they purchased the car for made them very happy. The price I received for the car made me very happy. In the end it would seem that everyone came away happy.
Now, we could argue that had I put the car in an auction...............but what would be the point? It sold for what someone else thought it was worth to them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.