Recently, I have been reading books on the basics of value investing to reinforce the ideas of value investing. It always good to read about the tenants of value investing again once in a while, so that I can keep my legs firmly planted into the world of value investing and not let my views be diluted by the masses. This book review covers the book called “The Warren Buffett Stock Portfolio” written by Mary Buffett and David Clark. It delves into some of the stock purchases of Warren Buffett under Berkshire Hathaway and why Warren bought them. The stocks covered in this book includes:

- American Express
- BNY Mellon
- The Coca-Cola Company
- ConocoPhilips
- Costco Wholesale Corporation
- GlaxoSmithKline
- Johnson & Johnson
- Kraft Foods, Inc.
- Moody’s Corporation
- Procter & Gamble
- Sanofi
- Torchmark Corporation
- Union Pacific Railroad
- U.S. Bancorp
- Wal-Mart Stores, Inc.
- Washington Post
- Wells Fargo & Company

- Look at the EPS from 2001 to 2011. For J&J, the EPS increased from $1.91 in 2001 to $4.95 in 2011. This is a 159% increase in EPS or a compounded annual growth rate (CAGR) of 9.99% for the last ten years. The after-corporate tax initial rate of return is then determined by using latest EPS divided by current share price of $65 at time of writing. ($4.95/$65) x 100% = 7.6%. The initial rate of return can grow at its historical annual EPS growth rate of 9.99%.
- Look at BVPS from 2001 to 2011. The BVPS in 2001 was $7.95 and in 2011 was $23.05. This is a CAGR of 11.23%.
- Determine how much the J7J equity bond will yield by dividing EPS and BVPS of latest year. ($4.95/$23.05) x 100% = 21.4%. However, one can’t buy the share at BVPS but at current market price of $65.
- Determine how much will a $4.95 initial after-corporate tax rate of return growing at a yearly rate of 9.99% look like in ten years. To do that, you can use the Future Value Calculator. Key in “Interest Rate Per Time Period” as 9.99, “Number of Time Periods” as 10 and “Present Value” as 4.95 to get a future value of $12.83. This means that in 2021, one will get an after-corporate tax figure of $12.83, which is a 19.7% return for a $65 purchase price.
- How much will a EPS of $12.83 be worth in 2021? It depends on the price-to-earnings (PE) ratio of the stock in 2021. Use the ten-year historical low PE ratio of 12 to be conservative. $12.83 x 12 = $153.96 a share in 2021.
- If one bought J&J in at $65 and sold it off at $153.96 in 2021, the total return will be 136.8% or a CAGR of 9.01%.
- J&J has raised dividends every year for the last ten years. Conservatively, if J&J maintains its 2011 dividends of $2.28/share till 2021, we get a total of $22.80 of dividends per share. $22.80 + $153.96 = $176.76. Thus, at the end of 2021, our returns from the total gain would actually be 171% or a CAGR of 10.52%.

This book makes a good read for anyone who wants to know how Warren analyses companies before purchasing them and those who wish to recap the value investing dogma.

Nice review! Keep it coming dude!

Thanks!

I’m a total newbie, may how do we get the EPS historical data?

I tried to google it but couldn’t find 2001 eps = 1.95 and eps 2011 = 4.95

I only find 2011 eps is 3.49 from J&J website.

Thanks,

Martin

Hi Martin,

Thanks for visiting my blog!

You can obtain from http://www.morningstar.com and http://investing.money.msn.com/investments/financial-statements?symbol=jnj. Hope it helps.