Follow the cash
15 December 2022
This week, we follow the advice of Warren Buffet.
His thesis: a good company creates value and generates cash flows. These flows must be easily identifiable. Whether they are returned to shareholders or reinvested in the company.
Practical application with Coca-Cola (cumulative figures since 2010) :
- $520 billion in revenue collected
- $370 billion in general costs (raw materials, manufacturing, distribution, etc)
- $30 billion in other costs (interest, taxes, etc)
- and finally, $30 billion in investments (machines, factories, acquisitions and disposals of companies, etc.)
Results : almost $90 billion of cash generated by the company.
How does Coca-Cola use this surplus? It gives it back to you. All of it. Via $60 billion in accumulated dividends and $20 billion in share buybacks.
Same reasoning with Netflix (figures also accumulated since 2010):
- $160 billion collected from its customers
- $60 billion in general costs (marketing, R&D, administration, etc)
- 10 billion in other costs (interest, taxes, etc)
- and, brace yourself: $104 billion spent on additional content on the platform
Results : $14 billion deficit (including $1.3 billion over the last twelve months).
And no return to the shareholder. It's not surprising. Netflix has taken us from a world where a DVD is worth 15€ to a world where you get almost 6,000 series and films for 8€ a month.
Fantastic for the user. A little less so for the company. Especially when competition is increasing: the only way to keep customers is to spend massively on content.
In the case of companies that reinvest the flows generated (such as Netflix, which invests in its catalogue), it is important to ensure that these reinvestments bear fruit and generate growth. This is a difficult point to validate at Netflix, which has been stagnant in terms of subscriber numbers for a few quarters.
A company that does not pay out to its shareholders but grows its market share and margins can be an excellent investment vehicle, as can a company that does not grow but pays out its profits in dividends.
Follow the cash.
A good exercise to realise how much value a company generates or not.
Market and portfolio focus
Behaviour:
Sur la semaine (du 6/12 au 13/12), le fonds reprend +1.9% tandis que le Nasdaq progresse de +1.5%. Notre performance s’explique par la progression des titres Pfizer (+ 7% sur la semaine) et BioNTech ainsi que par notre position dans l’obligation perpétuelle SAS Airlines.
Lines:
BioNTech: we reduced the line from 2.5% to 1.5% of the fund yesterday after the sharp rise in the price. We are crystallising our profits and gaining agility on the stock.
Have a great week,
Pierre
Disclaimer
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