Forum Archive Index - March 2002

[hugh webber <hugh.webber@clear.net.nz>]

hullo Dick,
thanks for the compliment I'll do what I can.
I note you have picked up on one of Warren Buffett's ploys which is to look not 
just 
at what the p/e and gross yield is but also at the rate of growth in earnings
so that a share that may seem very fully priced in fact turns out to have been
very cheap further down the track. I remember saying I think about half way
through last year when someone asked how far would AIA go when they were 
about $3.30 that I thought they'd easily pass $3.50! They were then thought
to be overvalued at $3.30 by most punters.

Well obviously you have to make some assumptions re inflation and luckily 
we are now in a position to make some reasonable ones, post Reserve Bank Act.
The RB governor has a mandate to keep inflation within 0% to 3% but NZ has
an appetite for inflation - probably comes from having a relatively small 
economy
so there is less competition than in the US or even Australia.

Hence a couple of good stabs would be (a) 2% inflation a year (b) 2.5% inflation
a year.
            (a)         (b)                    (c)      (d)        (e)       
          2% pa    2.5% pa   Unadj div     Div/2%  Div/2.5%
5yrs     10.4%    13.1%              19c    17.2c    16.8c                      
          
10        21.9       28.0                 31      25.4     24.2 
20        48.6       63.9                 80      53.8     48.8                 
             
30        81.1     109.8                209    115.4     99.6

 So, maybe the most startling result is that after just 10 years
a punter has doubled his dividend in real non inflated money and
assuming continuing full tax imputation he hasn't lost any of that in tax.
And assuming at least continuing confidence in AIA as it does this 
growth then the share price would have doubled to $8.28.
Makes even $4.14 look fairly cheap.


P.S. Sorry I never got back on that Warren Buffett article from Fortune
but I really enjoyed it and I have to say I agreed with it whole heartedly!.

PPS. Methodology - if you divide column (c) by column (a) after adding
100% to col (a) ....so the first item in col (a) becomes 1.104....then
you get 17.2 in col (d) ... & &.
                               


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