Essay About Berkshire Hathaway And Dividend Growth Model

Examining Berkshire Hathaways Purchase of Geico
Examining Berkshire Hathaways Purchase of Geico
Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa
September 12, 2001 -1-
White Paper:
Examining Berkshire Hathaways
1995 Purchase of GEICO Insurance
Tim Glowa
[email protected]
September 12, 2001
© 2001 Tim Glowa
Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa
September 12, 2001 -2-
Table of contents
Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa
September 12, 2001 -3-
Executive Summary
In 1995, Berkshire Hathaway purchased GEICO insurance for a 25% premium over its
traded share price. Many investors, including major brokerage houses and financial
reporters, questioned the wisdom of such an investment, especially since Berkshire
Hathaway with its near mythical chairman, Warren Buffett, was involved.
After reviewing the history of GEICO, Berkshire Hathaway, and the investing philosophy
of Warren Buffett, this paper reviews and evaluates the purchase of GEICO. This paper
examines two primary tools available for analyzing possible investments. The first is the
dividend growth model, which examines how a stock can be valued through examining
the dividend cash flow. The second examines the time value of money, through the
assumption that future dividends will flow directly to Berkshire Hathaway.
Additionally, the paper evaluates the profitability of the purchase of GEICO after a five
year period, assuming that all profits flowed to Berkshire. This five year window was
selected since financial data on GEICO is reported through the Berkshire Hathaway
annual report for the period 1995 to 2000. Finally, a discussion of the limitations and
assumptions associated