The objective of the Buffett growth model is to sum the gains of dividends and capital appreciation over an extended period, and calculate a compounding rate of annual return taking into account all tax liabilities incurred on the way.
The Buffett growth model operates by:
1/ Starting with shareholder equity at the start of Year 1,
2/ Working out a projected return on this equity using an averaged return on this equity from previous years.
3/ Apportioning this return between dividends, share buybacks and what remains to be reinvested within the company. New Capital raised outside of normal operations during the year must be taken into account.
4/ Recycling any retained earnings into subsequent year shareholder equity. Then using this new Shareholder equity total as the earnings base for the subsequent year. The subsequent year becomes the new starting point for this process to repeat.
YUMC is an 'overseas share', caught by NZ's FIF tax regime. FIF tax is paid on 5% of the opening balance of each share owned. At a tax rate of 30%, this works out at:
0.3 x 0.05 = 0.015, or 1.5% of the opening balance total, payable each year (actually FIF tax is charged on a whole of portfolio basis. But for the purpose of this exercise, we shall assume the entire FIF portfolio consists of YUMC shares only) For NZers, this FIF tax has to be separately accounted for in this calculation each year, and summed over the study period
We are looking at a study period, ten years into the future. The amount that must be paid for this FIF tax can be netted off against any overseas withholding tax paid on dividends. That is because, under the FIF regime, there is no separate tax on dividends. The withholding tax on dividends on NYSE listed YUMC and paid by YUMC on the investor's behalf is currently 15%.
Return On Shareholder Equity: Working Figure
Post 21 allows us to calculate an
averaged five year ROE figure:
( 13.1% + 18.8% + 19.4% + 20.7% + 21.9 %) / 5 =
18.8%
Price Earnings Ratio: Working Figure
To value our share each year, we need to calculate an
appropriate PE value to use. Despite operating for some thirty years, YUMC has only been separately listed for three. Using just three data points is not a very reliable way to calculate a representative average PE figure. This is particularly so when one of those figures was inflated by a since withdrawn takeover offer (Year 2017). I have taken 15% off the year 2017 PE figure to remove this takeover premium.
( 21.4 + 0.85x27.2 + 25.2 ) /3 =
23.2
The derivation of this PE figure has been calculated using a shallow data set. Nevertheless it is the best figure we can get, based on the possibly not representative three year sharemarket trading period we have to draw information from.
Dividends
Only one dividend of 10c per share has been declared over FY2017, the latest year in which an annual report was published. This relates to the period Q4 for FY2017. Over FY2018 there have been four quarterly dividends declared: 10cps, 10cps, 10cps and 12 cps. Given the growth path of the company, I am forecasting dividends for FY2021 to be 13cps, 13cps, 13cps and 13cps. Following an incremental pattern, I am going to model future dividend payments for the years in which we are studying to be as follows:
|
Forecast Dividend |
| FY2018 |
42cps |
| FY2019 |
42cps |
| FY2020 |
46cps |
| FY2021 |
52cps |
| FY2022 |
58cps |
| FY2023 |
64cps |
| FY2024 |
70cps |
| FY2025 |
76cps |
| FY2026 |
82cps |
| FY2027 |
88cps |
| FY2028 |
94cps |
On 4th October 2017, the board increased the aggregate quantum of shares to be repurchased to $550m. As of the end of FY2018, the aggregate of share repurchases had reached $455m. That leaves $95m worth of shares still authorized to be bought back. Yet counter intuitively, the number of shares on issue continues to go up year on year. What is the explanation for this?
As stated in AR2017 p37:
"The company's executive compensation program has three primary pay components: base salary, annual performance based cash bonuses and
long term equity awards."
We learn on p119 of AR2017 that:
"The company has reserved for issuance under the "Yum China Holdings Inc. Long Term Incentive Plan" 45 million shares of our common stock. Under this plan, the excise price of stock options and SARs (Stock Appreciation Rights) granted must be equal to or greater than the fair market value of the company's stock on the date of the grant"
Options and SARs vest after three to five years and expire ten years after they were granted. Share based compensation is recognized in the "Consolidated and Combined Financial Statements" on a straight line basis over the service period based on their fair value on the date of the grant. When the options are redeemed, the company gets a cash injection based on the awarded price of the share options granted. But the employee gets to keep the difference between the price at the time the option was awarded and today's market price.
Again from p121 of AR2017, at the end of that year, 14.072m shares become exercisable at a weighted average excise price of $16.69. If all of these were exercised, this would represent a capital inflow to shareholders equity of:
14.072m x $16.69 = $235m
Actual new equity inflow over the period was $27m. That is equivalent to about 1.617m new ordinary shares created ( $16.69 x 1.617m = $27m)
The current authorized buy back limit of $95m would buy back 2.375m shares at $40 each. 2.375m shares to be redeemed is way short of the new 14.072m -1.617m = 12,455m shares that could be created at any time. it looks like the number of shares bought back will continue to be outweighed by the number of employee earned new shares vesting.
Buffett Growth Model (2018 Perspective): Data
Originally Posted by Snoopy
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