The investment management principles practiced by Tweedy, Browne derive from the work of the late Benjamin Graham, professor of investments at Columbia Business School and author of Security Analysis and The Intelligent Investor. Tweedy, Browne’s research seeks to appraise the worth of a company, what Graham called “intrinsic value,” by determining its acquisition value, or by estimating the collateral value of its assets and/or cash flow. The term “intrinsic value” may also be referred to as private market value, breakup value or liquidation value. The process is more closely related to credit analysis, for as we have said, we are as concerned with the return of our capital as we are with the return on our capital. Investments are made at a significant discount to intrinsic value, which Graham called an investor’s “margin of safety.” Investments are generally sold as the market price approaches intrinsic value, with the proceeds reinvested in other situations offering a greater discount to intrinsic value. Adhering to the principles of intrinsic value and margin of safety results in an investment policy that runs counter to the general market psychology, and reduces the decision to purchase or sell securities to a discipline rather than an art.
In determining intrinsic value, our research focuses on fundamental principles of balance sheet and income statement analysis, and a knowledge and understanding of actual corporate mergers, acquisitions, and liquidations. From more than 20,000 publicly traded corporations worldwide, we research and select for investment, those issues selling at substantial discounts to our estimate of intrinsic value. To minimize errors in analysis or events which could adversely affect intrinsic values, we adhere to a policy of broad diversification within individual portfolios, with no one issue generally accounting for more than 3% to 5% at cost of portfolio assets, and no one industry group accounting for more than 15% to 20% of portfolio value. Portfolios are not constrained by market capitalization considerations with the result that a significant portion of portfolio assets may be invested in smaller (generally under $1 billion) and medium (up to $5 billion) capitalization companies.
Most investments in Tweedy, Browne portfolios have one or more of the following investment characteristics: low stock price in relation to book value, low price-to-earnings ratio, low price-to-cash-flow ratio, above-average dividend yield, low price-to-sales ratio as compared to other companies in the same industry, low corporate leverage, low share price, purchases of a company’s own stock by the company’s officers and directors, company share repurchases, a stock price that has declined significantly from its previous high price and/or small market capitalization. Academic research and studies have indicated a historical statistical correlation between each of these investment characteristics and above-average investment rates of return over long measurement periods.
Tweedy, Browne has compiled a complimentary booklet, included herein, entitled What Has Worked In Investing. We encourage all current and prospective shareholders to read it. It describes 44 academic studies of certain investment criteria that have produced high rates of return. In the 44 studies included in What Has Worked In Investing, exceptional returns were found for stocks with one or more of the following investment characteristics: low stock price in relation to book value, net current assets, earnings, cash flow, dividends or previous share price; small market capitalization; and a significant pattern of stock purchases by one or more insiders (officers and directors), or by the company itself. The study periods ranged from 1 year to 55 years; indicated annual returns ranged from 12.1% to 49.6% and indicated annual returns in excess of the market index used in the studies ranged from 2.7% to 33.5% for the various characteristics and historical periods that were examined. Approximately one-half of the studies examined in the booklet focused on U.S. stocks and the balance focused on mature foreign stock markets. Many of the investment characteristics explained in this booklet, which are “value” oriented characteristics, have been the core of Tweedy, Browne’s investment philosophy and stock selection decision making process since 1959, and are the basis for the management of the Value Fund and the Global Value Fund.
INVESTMENTS IN VALUE STOCKS THAT PAY HIGHER THAN AVERAGE DIVIDENDS
On September 5, 2007, Tweedy, Browne launched a new fund, the Tweedy, Browne Worldwide High Dividend Yield Value Fund. While this fund is steeped in our value philosophy, it is somewhat different from our more traditional value mutual funds. This Fund seeks long-term growth of capital by investing in companies around the globe that the Adviser believes to have above-average dividend yields, an established history of paying dividends and reasonable valuations. The firm has managed some accounts with this strategy since 1979 and began to offer it more broadly beginning in 2006.
There are a number of reasons why we believe dividends are important:
Over the long term, the return from dividends has been a significant contributor to the total returns produced by equity securities. According to Standard & Poor’s, dividends comprised an average of 34% of the monthly total return of the S&P 500 from 1926 to 2004.
Stocks with apparent high and sustainable dividend yields may be more resistant to a decline in price than lower yielding stocks because the stock is , in effect, “yield supported.”
The reinvestment of high dividends in additional shares of high dividend yielding stocks during stock market declines can help lessen the time necessary to recoup portfolio losses.
The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its income stream. This is particularly pertinent in light of the complexity of corporate accounting and numerous recent examples of “earnings management”, including occasionally fraudulent earnings manipulation.
Since the enactment of the 2003 Jobs and Growth Tax Relief Reconciliation Act, dividends received by most individual taxpayers are now taxed at the same favorable rates as long-term capital gains (maximum 15% federal tax rate). Note: Tax rates on dividends could change back to ordinary income tax rates at some point in the future.
Most importantly, there is an abundance of empirical evidence which suggests that portfolios consisting of high dividend yielding securities may produce attractive total returns over long measurement periods.
Tweedy, Browne has compiled a complimentary booklet, included herein, entitled The High Dividend Yield Return Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with Attractive Returns Over Long Measurement Periods. We encourage all current and prospective shareholders to read it.
The information and studies presented above provide a review of the relative past performance of selected securities associated with high dividend yields and other value characteristics. The investment returns presented in the studies represent past performance and should not be considered indicative or representative of the future performance of any of the Funds, nor should it be inferred that the future performance of any of the Funds will equal or exceed the performance set forth in the studies. Although we are not aware of their existence, there may be studies that exist that contradict the conclusions of the studies presented herein.
Past performance of markets or of any individual security may not be indicative of future results.