Australian Politics General...

[luutzu]

It's really short sighted to invest based in dividends alone, you should invest based on what the company is going to make in profit and what they plan to do with it.

No, the total profits the bank makes, is 16% of the share holders equity ie the net amount of assets owned by share holders.

For example, you start a pizza shop

You put in $50K of your own money, and borrow $50k from the bank, so you have $100k in total.

You rent a shop front, hired a manager, you spend the $100k to buy a pizza oven, fit out the shop nicely, signage etc.

After 12 months the shop made $55k gross profit, you pay $5k to the bank in interest, you $15k in tax, leaving you with $35k profit.

Your $35k after tax profit is a 70% return based on your equity of $50k you put in at the start.

So you as a share holder are earning a 70% return on equity, which is really good.

Cba is currently earning 16% on the funds its share holders have put in.

So you gonna get a Domino franchise or keep owning bank stocks?

How much profit do you think a pizza shop make per sale?

Say it's a Pizza Hut pizza at $7 selling price. I'm pretty sure you're not making 200%+ on the main ingredient. And pretty sure the guys that sell you the flour, the cheese aren't selling them to you at less than inflation rate.

 

[sptrawler]

By all mean make profit. Just don't screw over (mainly poor) people and pensioners out of their interest and calling it fair.

I don't think they do, the four major banks take on board all of Australia's borrowings and lending's, this is the reason we didn't fall over in the GFC.
Imagine if we had hundreds of small banks, that were borrowing money from overseas, the GFC happened then the overseas banks call in their debts.
Most of our small banks would have defaulted, because they were on lending the money, at $100 to say $10 deposits.
Then all those smaller banks, would have gone bely up, losing the deposits and the shareholders money.
The four pillars banking system underpins our financial stability, we are a small population, with a ridiculous perception of our importance.
We want the stability of a banking system, that gives us a warm feeling about the security of our money, but we want to screw them down to risking that security.weird IMO
Better still what would you say the banks should lend your money out to start up companies, mining exploration, oil exploration, small business(where 90% fail in the first year) and then what should they give depositors in the way of interest?
Better still everyone is talking a housing bubble, but our banks still have to supply money, for people to buy houses.
Yet they have to remain stable if a bust happens, yet you guys say they are screwing people, would you take on the risk?
They have to, and still be able to manage the fall out if a bust happens, they have a difficult position.

 

[luutzu]

I don't think they do, the four major banks take on board all of Australia's borrowings and lending's, this is the reason we didn't fall over in the GFC.
Imagine if we had hundreds of small banks, that were borrowing money from overseas, the GFC happened then the overseas banks call in their debts.
Most of our small banks would have defaulted, because they were on lending the money, at $100 to say $10 deposits.
Then all those smaller banks, would have gone bely up, losing the deposits and the shareholders money.
The four pillars banking system underpins our financial stability, we are a small population, with a ridiculous perception of our importance.
We want the stability of a banking system, that gives us a warm feeling about the security of our money, but we want to screw them down to risking that security.weird IMO

It was the biggest banks in their respective country that crashes themselves and the economy. Not small banks.

If it was the small banks that crashed, there wouldn't have been any bail out.

Those bank crashed because they loaded up on CDOs and other useless and worthless paper mortgages and weren't smart enough like Goldman Sachs to get out before it imploded.

I haven't looked at how the Aussie banks managed to survived it... maybe they're a bit behind and Wall St. figured we're too small on the global scale to bother. That or some good regulation about capital reserves.

But banks don't get strong because they screw depositors over. Well, they do get rich and I guess that make them strong. But why should depositors pay for it anyway?

 

[Value Collector]

So you gonna get a Domino franchise or keep owning bank stocks?

How much profit do you think a pizza shop make per sale?

Say it's a Pizza Hut pizza at $7 selling price. I'm pretty sure you're not making 200%+ on the main ingredient. And pretty sure the guys that sell you the flour, the cheese aren't selling them to you at less than inflation rate.

I am not recommending investing in pizza shops, just trying to help rumple understand return on equity.

But it is quite normal for a lot of businesses to have gross profit margins of more than 200%, gross profit is not net profit.

Also as I said I don't own bank stocks ( except through Berkshire and index funds)

 

[Value Collector]

Yes fine, but when the shares were originally allocated they would have cost say $1 each. The share price is now say $80. So that 16% is only relevant to the people who bought the shares at issue time correct ? And they are probably all dead or have sold their shares.

So your 16% means nothing to people who buy shares now . Am I right ?

The 16 percent means everything to the people buying now, it's the rate at which their assets are earning and compounding.

The bank doesn't pay out all its earnings in dividends, it keeps about 20% and reinvests it.

So if it earned $5 per share in earnings, paid out $4 and retained $1.

That $1 could be reinvested back into the business earning 16%, which would mean earnings per share increase next yeah by 16cents per share.

If investors are willing to pay 15 times earnings, that extra 16 cents in earnings will increase the share price by $2.40 so because of the high return on equity the retained $1 grew to $2.40, so you want your company to have a good return on equity, that's the foundation for your profit.

If a company only had a return on equity of 5% the retained dollar would only increase earnings by 5cents, and people would only want to pay less than 10times earnings, meaning the retained $1, would only increase share price by 50centd, making it a terrible investment

 

[wayneL]

didn't you just admit before one guys expense is another guys revenue.

e.g., that "loss" the silly negative gearing guy experiences is adding revenue to the income statement of the banks, banks staff and depositors, where it will be taxed

Is that a zero sum game though?

Somehow, I thing accountants will make sure it isn't.

 

[SirRumpole]

I am not recommending investing in pizza shops, just trying to help rumple understand return on equity.

Thanks for your patience.

I get what you are saying, but in the end it's the return to the shareholder not the company that matters to [most] investors.

Retained profits is good for growth so those have to be taken into account if people are going to hold for capital gain.

Most people who want an alternative to a bank deposit would still go for dividend yield I would think.

 

[Value Collector]

I get what you are saying, but in the end it's the return to the shareholder not the company that matters to [most] investors.

The company's returns is what creates the share holders return,

If a company is to grow profits over time, and therefore grow dividends and capital value, it needs to be earning a decent return on equity.

Most people who want an alternative to a bank deposit would still go for dividend yield I would think.

initial dividend yield is less important than what the dividend will be next year, or the year after or five years time.

A company that can continually reinvest part of its earnings into investments making a high return on equity invested, can keep continually increasing its dividend, while also growing in capital value.

A company with low return on equity will struggle to grow it'd dividend and capital value.

 

[Value Collector]

Thanks for your patience.

.

Let me give you another analogy that I think will show the importance of return on equity.

Let's say there is two bank accounts that have come up for sale, which you can bid on.

Bank Account A -
Has $1000 in it, earning 10% and it pay out all $100 of its interest as a dividend each year

Bank Account B-
also has $1000 in it, but it Earns 20% but it only pays out $100 interest as a dividend and retains $100 which it reinvests back into the account earning 20%


Which account is the best to own? which is worth more?

A person looking to earn a 5% dividend might say A and B are equally valuable, because they pay the same $100 dividend they would be willing to buy A and B for $2000 each so that they can earn a 5% yield, and not want to buy B if it were a bit higher in price than A, because it would then have a lower dividend yield.

However,

B is the best account, because every year it is putting half of its earnings back into the account earning 20%, and even though they both pay the same $100 dividend in year one, B's dividend will continue to grow faster and faster.

After 5 years account B, has $1610 and it pays a $161 Dividend
After 10 years account B, has $2592 and is paying $259 Dividend
After 20 years account B, has $6722 and is paying $672 Dividend

But if you owned A, it would just continue earning you $100 every year, never growing.

 

[SirRumpole]

Which account is the best to own? which is worth more?

Yes, you have given a good description of compound interest there and presumably the owner of A could achieve a similar effect by leaving the interest in the account.

In the company situation however, there is no guarantee that retained earnings will be returned to shareholders, it could be used to offset losses or pay off creditors so it's a bit difficult to make a comparison with a bank account in that case.

These sort of fluctuations are reflected in the share price which is the ultimate indicator of company value.

 

[Value Collector]

In the company situation however, there is no guarantee that retained earnings will be returned to shareholders, it could be used to offset losses or pay off creditors so it's a bit difficult to make a comparison with a bank account in that case.

That's been kinda my point all along, e.g. Owning equity in a business has more risk than having a secured deposit in a bank.

Off course a company can make bad investment choices and lose your retained earnings, look at masters, woolies lost millions of share holders equity there.

But, owning a group of companies, with high return on equity, with shareholder focused management, bought at sensible prices will outperform most other investments.

Chasing dividend yield without also making sure the company is generating good internal returns on the capital invested in it can be a disaster.

 

[SirRumpole]

That's been kinda my point all along, e.g. Owning equity in a business has more risk than having a secured deposit in a bank.

I have never denied that, I've just questioned your risk/reward equation which tends too much towards shareholders (talking about banks here), who I think we both agree take on very little risk in this country but get much higher rewards than those who supply their trading stock in the first place.

 

[Value Collector]

I have never denied that, I've just questioned your risk/reward equation which tends too much towards shareholders (talking about banks here), who I think we both agree take on very little risk in this country but get much higher rewards than those who supply their trading stock in the first place.

16% for the best in class bank business isn't to high, Consider that the company that makes the flu vaccines is earning about 40%, Woolworths earns like 23%, capilano honey is 28%,

Even in bad years the miners earn about 10-15%, and in the best years can earn 60%+

 

[sptrawler]

16% for the best in class bank business isn't to high, Consider that the company that makes the flu vaccines is earning about 40%, Woolworths earns like 23%, capilano honey is 28%,

Even in bad years the miners earn about 10-15%, and in the best years can earn 60%+

You are wasting your time, trying to explain something that people don't want to hear.
Pauline, pre election was all for the banking Royal Commission, post election she was given a briefing by the treasury and now not a bleat.
The four pillar banking system, is all that is stopping a wobbly third world economy, from falling over. IMO

 

[luutzu]

16% for the best in class bank business isn't to high, Consider that the company that makes the flu vaccines is earning about 40%, Woolworths earns like 23%, capilano honey is 28%,

Even in bad years the miners earn about 10-15%, and in the best years can earn 60%+

What's the average ROC for a typical bank depositor?

 

[luutzu]

You are wasting your time, trying to explain something that people don't want to hear.
Pauline, pre election was all for the banking Royal Commission, post election she was given a briefing by the treasury and now not a bleat.
The four pillar banking system, is all that is stopping a wobbly third world economy, from falling over. IMO

So we should all pay a price and have our deposits used but unfairly paid for... all so the bank can be strong and save the economy?

I'm sure that if depositors earn something from their cash, they'll also contribute to the economy.

Aren't we a capitalist society? Why should the banks be nannied and permitted to screw over depositors?

This is the same argument the big miners made when Labor thought to tax their super-profit. It'll weaken the economy, jobs will be lost, we need to keep our profit to make us competitive, the Aussies ought to not get their fair share so that we'd make profit and save them by giving them jobs and more money?

How'd that worked out when the global commodity market shrunk? Big miners still keep jobs going? They take out their super profit and keep alive sites and hiring contractors just to keep them working?

 

[sptrawler]

What's the average ROC for a typical bank depositor?

That would depend on what they are investing in, if they are just putting their money in the bank, not much at the moment.
However if inflation returns to normal, and bank deposits are returning 7 - 10 %, there will be a massive rush for bank account deposits.
Then shares will tank, and everyone will be bitching about the loss of capital in shares, house prices will drop because a 5% return with a $hit tenant won't cut it.
Then I hope you will be going on about the poor property investor, or the bank shareholder that has his share price halved and dividend less than bank interest. We've seen it all before.

 

[luutzu]

That would depend on what they are investing in, if they are just putting their money in the bank, not much at the moment.
However if inflation returns to normal, and bank deposits are returning 7 - 10 %, there will be a massive rush for bank account deposits.
Then shares will tank, and everyone will be bitching about the loss of capital in shares, house prices will drop because a 5% return with a $hit tenant won't cut it.
Then I hope you will be going on about the poor property investor, or the bank shareholder that has his share price halved and dividend less than bank interest. We've seen it all before.

It just show my ignorance but aren't more demand for deposits a good thing for banks?

It's not like they'll still be lending out at 4% if deposits/interest rate are 5%. They'll charge deposit+200% on to anyway.

No, I wouldn't be crying for the poor property investor. Not because I have anything against them, but the property market is fairly open and if they do their homework they would know whether a purchase is a good idea or not.

Compare this to the average depositor. The four major bank are colluding to keep interest rate on deposits low. Depositors have little choice but to take it. It's not a free and open market.

I actually prefer a higher interest rate environment. It will weed out bad businesses as the cannot live off of cheap money.

They will either have to get more productive or close shop. That will mean and more honest and proper market where good business survive and weak ones aren't being prop up by cheap cash.

Less distortion that way.

If money is so cheap, empire builders will recklessly load up on acquisitions through debt. Inflating prices and giving an inflated price on their own stock.

All that while properly managed, sensible companies with little or no debt, profitable but cautious operators. Their price tend to be depressed or not as sexy as "growth" through acquisition.

 

[SirRumpole]

Then I hope you will be going on about the poor property investor, or the bank shareholder that has his share price halved and dividend less than bank interest. We've seen it all before.

So then the investor sells their shares and puts the money in the bank. Bank has more liquidity, lends out more money and the cycle goes on.

The bottom line is that more than 50% of the economy is consumer spending. If consumers spend, businesses make money and vice versa. Every buck that non discretionary spending such as increases power prices or increased health insurance takes is less that will be spent at the grocery aisle or at Harvey Norman or at the street cafes. Then business starts whinging about no customers.

So if business screws the consumers, the consumers will screw back but they won't make a fuss about it, they just won't spend any money.

I presume you have noticed that full time jobs are disappearing and wages are going backwards ? Business is laughing at the moment but eventually consumer demand will dry up and the customers won't be spending as much.


Then we have a recession and everyone loses.

 

[luutzu]

So then the investor sells their shares and puts the money in the bank. Bank has more liquidity, lends out more money and the cycle goes on.

The bottom line is that more than 50% of the economy is consumer spending. If consumers spend, businesses make money and vice versa. Every buck that non discretionary spending such as increases power prices or increased health insurance takes is less that will be spent at the grocery aisle or at Harvey Norman or at the street cafes. Then business starts whinging about no customers.

So if business screws the consumers, the consumers will screw back but they won't make a fuss about it, they just won't spend any money.

I presume you have noticed that full time jobs are disappearing and wages are going backwards ? Business is laughing at the moment but eventually consumer demand will dry up and the customers won't be spending as much.


Then we have a recession and everyone loses.

It's killing the host.

This is why pure, unregulated, capitalism will end up destroying its host then die off itself.

I heard, I think it was Chomsky, saying that back in the 50s and 60s, capitalists were a bit smarter. They actually tell the gov't to regulate them from themselves. That if corporations are given free reign, the nature of their structure will mean that they will soon destroy themselves.

So they actually want minimum wages, want unions, want environmental protection.

When such rules are applied equally across the board, corporate managers will then find it economical and sensible to compete and screw people within that boundary.

But since then, captains of industries do not think beyond the quarterly reports and short term profit. So they lobbied gov't to deregulate, destroy union and start screwing their own labour force.

When the law permit it, or look the other way, a long term thinking manager who might be somewhat nicer and more humane, that manager cannot decide anything but also screwing the labour force, the environment and past those externalities onto the public and the environment. i.e. that's someone else's problem and they have to make profit, can't play nice or else they'll lose.

So here we are... lobbied to lower taxes, cut away workers protection, environment be damned... Then where's the money to fund and educate future workforce? Where's the money to build infrastructure that help move business along? Who has job security and spare cash to spend a little?