The DC Today - Wednesday, February 15, 2023

Episode 560: The DC Today - Wednesday, February 15, 2023

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“If valuation matters at the time of purchase, why would it not matter at the time of reinvestment of dividends from that same company purchased?”

~ Steve

The simple answer is – it does, and if we felt a company’s valuation was so excessive that we didn’t want dividends reinvested in that company, why would we want to own the company at all? So the question about reinvestment always answers itself. If a dividend shouldn’t be reinvested in the company issuing it, it shouldn’t be owned at all. We apply the SAME criteria to holding a stock that we do buying it – that is, valuation sensitivity and risk/reward prudence.

Now, why would we potentially reject a stock at $225/share, buy it at $150/share, and then still keep it when it is back above $200/share? Is it a matter of just liking it differently now versus when it was first at $225? Less subjectively than that, the entry yield was likely different, the free cash flow projections were likely different, the buffer of safety was different, management forecasts of dividend growth were likely different, and where the company or economic cycle stood was likely different. So criteria always include different inputs and points of emphasis and focus at different times and therefore at different prices.

A company can be at 20x earnings and $100/share, and then 10x earnings and $200/share. Valuation, not price, always and forever. But along with valuation are Free Cash Flow, growth rates, dividend yield, capex expectations, and much more.

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David Bahnsen

David Bahnsen

David is the Founder, Managing Partner, and the Chief Investment Officer of The Bahnsen Group.

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