March 2023

The Secret Sauce, CAGRs, and The Graham Number

The following quote is taken from the Berkshire Hathaway 2022 Annual Report:

The Secret Sauce

In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.

These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion.

Berkshire Hathaway Reports

Dividend growth drives price growth. It’s “the secret sauce”, as Warren Buffett calls it. This is why I believe choosing dividend-growing companies is important.

Just because a company pays a dividend does not mean it’s a dividend grower. Research has to be done to see if the company fits the criteria. A company that maintains their dividend but has no price growth is similar to owning a bond. There are no cap gains and no dividend increases.

As an investor, I need some type of movement, whether it’s in price, income or both.

Wouldn’t both be the ideal scenario? Yes, it would!

But how can I determine the future growth of a company today, to ensure I can maximize on that ideal scenario in the future? That’s the tricky part, and where research comes in for the investor.

Every investor will have their own stock analysis criteria, and in my February post I mentioned some of mine. Today, we’ll look at that criteria a bit more.

Let’s start with BMO as an example: