Tag Archives: dividend policy

Buffett Tutorial on Accounting and Valuation: See’s Candies Case Study

I have always maintained that excepting fools, men did not differ much in intellect, only in zeal and hard work.  –Charles Darwin

Value investing works, because it does NOT work ALL the time. –Joel Greenblatt

Today’s post focuses on accounting (GAAP) and valuation through the words of Warren Buffett. The case study on See’s Candies and the other readings will help improve your skills. The burden is on you to understand and apply the lessons. If you do not understand FIFO or deferred taxes, then look up those terms in a basic accounting book, then do problem sets to grasp the concepts. Don’t take Buffett’s words on faith; try to apply the concepts of economic Goodwill to a commodity based company like, for example, US Steel (X) versus a franchise company like Coca-Cola (KO). Do you agree with Buffett’s analysis?

Prof. Joel Greenblatt’s book, The Little Book that Beats the Market, is (simply) an application of Buffett’s thoughts on economic Goodwill.

Helpful hint: Take a subject like share repurchases or divdend policy and try to find many different sources on the subject. Learn the subject to death. Master how, when or if a company should act in returning capital to shareholders.

See’s Candies Case Study:Sees Candies 2012


A Parable on Valuation: The Old Man and the Tree or a Parable of Valuation

Inflation:Inflation Swindles the Equity Investor and Buffett inflation file

EBITDA: Placing EBITDA into Perspective and TEV to EBITDA Research

Joel Greenblatt: Little Book That Still Beats the Market, The – Joel Greenblatt

Secrets of (view): http://youtu.be/3PShSES5nBc   25 minutes

Corporate Finance

Share Repurchases: Corporate Structure and Stock Repurchases and Assessing Buybacks from all Angles_Mauboussin

Dividends: Dividend Policy, Strategy and Analysis

You will beat Wall Street easily if you apply the above lessons. The hard work is in mastering the material.   Stay the course.

Capital Allocation and Compounding Machines

Readers’ Questions

Several readers have struggled with understanding the common success factors of the companies discussed in this post: http://wp.me/p1PgpH-Qw

Any company with exceptional returns has been able to generate returns above it cost of capital while being able to redeploy free cash flow at rates above its cost of capital (marginal returns on capital). See one poster child:WMT_50 Year SRC Chart.

Ok, its easy to look back at successful companies and say wow! But what can we know A priori that can help us in our search than just “good”management, “passion for excellence” and all the other corporate consultant buzzwords?   There may be no common theme between Altria, Aflac, or Danaher or Eaton Vance but we do know that all companies successfully generated above average returns for a long time.  Let’s try to think more deeply and test our assumptions.  The first place to start might be management’s allocation of capital because not all of these companies had barriers to entry (Leucadia comes to mind).

Allocating capital and operating the business are the main jobs of management. The two are intertwined.  Does the company retain its excess capital to reinvest in the same business, make acquisitions, pay a dividend and/or buy back stock (at what price?). There are no simple answers or one size fits all approach. And if it were that easy then there probably wouldn’t be as much opportunity for investors who do find good capital allocators.

The linked papers below will go in depth into the issues and problems around corporate capital allocation.  Take the time to read these because the readings should help you think more intelligently about a crucial aspect of investing–how management teams allocate YOUR capital.

Dividend Policy, Strategy and Analysis

High Dividends Research by Tweedy Browne


Corporate Structure and Stock Repurchases

Punishment and Prizes

For those who have not worked hard at understanding corporate finance and the implications of capital allocation while investing then you face a flogging: http://www.youtube.com/watch?v=W1Ipb0WpoGI

For those who feel they are experts at capital allocation then you win first place and a date with Sasha: http://www.youtube.com/watch?v=6a7Kf1e5lEI

Keep learning!