No. of Recommendations: 13
Using DE before realizations, current earnings yield is 7.36%. Including realizations which are lumpy but real, bumps earnings yield up to 8.81%. Viewed from this lens, BN is a good value but not absurdly cheap given the current macro economic environment.
Great post. But on this comment above you are perhaps viewing the company somewhat as bond. A bond yielding 8.81% would be considered *very* cheap (the 10-year by compassion is 4.5%). But bond earnings are fixed, whilst Brookfield's distributable earnings are growing (factually grew and set to continue growing) at a rate of more than 15%.
A yield of x% that pays all cash out and also grows the earnings at a rate or y% has an effective yield of (x+y)% for purposes of comparing to a bond with a fixed yield.
But BN doesn't pay (much) cash out so we can't simply add the yield and the growth in this way. It is using the earnings itself for much of its growth.
A sane approach is to look at the comparable opportunities. A typical company at a typical time the last century has a PE of 15 (an earnings yield of 6.7%), and grows earnings at a rate of 2% above inflation each year (the average of the last century), and pays out about 3% in dividends. So growth plus dividends is about 5%, and that is your real total return - provided you buy and sell at the same valuable multiple there is no other value you can extract.
If growth was unchanged but the average multiple of the market was double at 30, then you would get the same growth but the 3% dividend yield would half to 1.5%, so your total return would be less at 4.5%. That is what good investors would prefer a perpetually cheap market (that remains undervalued, and never even recovers to a normal valuation) than a rationally priced market.
Right now the S%P500 dividend yield is 1.5% but that is temporary as the market is near a historically high valuation (the last 150 years it only traded this high about 4% of the time (vs sales, book value or normalized earning).
A company growing more than 2% above inflation reliably usually commands a higher PE than 15 (a lower yield than 6.7%).
In this context a firm growing earnings now than 10% above inflation as BN is achieving on trend, and capable to either continue growing or optionally today slow growth plans but diatribe all present earnings at a yield of around 7%, is *very* cheap.
Many would pay double the price today (resulting in a 3.5% earnings yield, growing over 10% per year) if they didn't know what the firm was and just looked at the likely earnings growth and current yield. This reconciles with managements's discount to Plan Value of about 50%.
Frankly I found the earlier threads about the company possibly having a culture of fraud and comparing to Enron of an insinuating category which is easy (maybe fun) to do but without any both substantial and specific details. BN has lots of moving parts, there are private deals taking place almost daily, but .. they do put out far more documentation about their business than they need to do. ( Every public subsidiary, and the parent, séparately issues the supplementary reports to reconcile / make more sense of the mandate IFRS financials, and a Shareholder letter quarterly and not only annually for all 5 subs, long investor presentations each yield, on top of the necessary filings. )
Management are overpaid throughout all large firms including BN, I of course despise it, but other than Berkshire can you point me to an approx $100B firm that doesn't have overpaid management? This criticism should be aimed at the systemic problem and introducing government limits rather than allowing the markets to voluntarily pay their CEOs less. That latter won't happen, and the trend is towards more greed each decade, not less.
Of course they have an optimistic tone but they are not a 'sit on your ass' (to borrow a phrase from Munger) business as Berkshire and it is their job to attract private investor to partner with new funds - this is our income growth source so we want them to have an optimistic tone. It isn't a 14th European church casting an atmosphere of illness and sin to recruit more loyalty. More importantly if you read their past plans going back 20 years (they often cited goals for 5 years) and the observed what they achieved, you find that their optimism isn't just spin but the goals in the past have been realistic and generally achieved or surpassed.
- Manlobbi
