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Ketan Hemnani's avatar

Legendary quality investor François Rochon stated that in the long-term stock prices will

always follow the owner’s earnings and that you can track the owner’s earnings as follows:

Owner’s earnings = Growth in Earnings Per Share + Dividend Yield

Here’s an overview of the evolution of Ulta Beauty’s owner’s earnings:

Growth owner’s earnings

CAGR Owner’s earnings (3 years) 25.4%

CAGR Owner’s earnings (5 years) 26.9%

CAGR Owner’s earnings (10 years) 24.2%

How did you calculate this owner’s earnings in ulta beauty investment case? Please explain with numbers!

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Compounding Quality's avatar

I calculated it myself.

The formula: Owner’s earnings = Growth in Earnings Per Share + Dividend Yield

You just make an overview of the change in the Owner's Earnigns in the past 5 and 10 years. :)

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Ketan Hemnani's avatar

Even I calculated it but mine are coming different

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Compounding Quality's avatar

Feel free to send over your calculations to pieter@compoundingquality.net

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Thomas's avatar

Sorry if I'm missing something, but is your interpretation of owner's earnings correct? Dividends tend to come out of EPS (or retained earnings), so if you're adding the dividend back into EPS you'll be adding funds that don't actually exist.

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Compounding Quality's avatar

Hi Thomas,

Dividends don't impact the Net Income. They impact the Free Cash Flow. That's why I'm adding them again. :) I hope this helps!

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Thomas's avatar

Thanks for response, but I’m still confused. If you were to add the dividend to EPS, wouldn’t that give you an inflated number? An owner can’t earn more than EPS.

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Compounding Quality's avatar

Hi Thomas,

I think this article will help you: https://www.investopedia.com/ask/answers/090415/are-dividends-considered-expense.asp

Let me know when this doesn't make it clear!

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Thomas's avatar

Thanks for the link, but I believe it just confirms what I was thinking. Unless if you are referring to preferred dividends, the metric doesn't agree with accounting rules.

As an example using the methodology in the infographic, let's say you have a services company that has no assets. They just have employees and they rent space, and they have no assets or retained earnings at the beginning of the year. At the end of the year, the company has produced $2,000 of net income. It pays out 75% of this, so the dividend is $1,500.

By the methodology in your infographic -

owner's earnings = EPS + dividend per share

or using aggregate numbers,

owner's earnings = net income + dividend,

the owner's earnings would be $3,500 (NI $2,000 + Div $1,500), but the owner didn't earn $3,500. The business itself only earned $2,000. In this instance, the owner can't earn more than what the business earned. This metric would be falsely adding an extra $1,500 that doesn't exist.

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Compounding Quality's avatar

Hi Thomas,

Now I see the confusion. And maybe it's formulated a bit unfortunately in the visual.

The concept of Owner's Earnings is based on the approach of Warren Buffett and François Rochon. You can find more info here and I guess this will make everything clear: https://acquirersmultiple.com/2023/11/francois-rochon-owners-earnings-the-key-to-investing-success/

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Thomas's avatar

Oh ok, when you put it in growth terms rather than absolute terms it makes sense 100%. Thanks for getting back to me!

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