Warren Buffett Guarantees You a Capital Loss

Warren Buffett Guarantees You a Capital Loss

Shares of Nevada electric generating company NV Energy closed at $23.81 on Wednesday. What makes that newsworthy is that any investor buying NV Energy shares at that price has what's essentially a guarantee from Warren Buffett of a capital loss on that investment.

The reason that loss is virtually guaranteed comes in the form of a buyout agreement. Buffett's Berkshire Hathaway is buying NV Energy for $23.75 per share in cash, with the deal expected to close in the first quarter of 2014. As the agreement has already been approved by NV Energy shareholders, chances are incredibly slim that a better offer will come along.

$23.75-$23.81 = ($0.06)
As a result, anyone paying $23.81 per share for NV Energy can reasonably expect to receive $23.75 per share when the deal closes. That's a capital loss of $0.06 per share, even before considering commissions. That capital loss will hold true as long as Buffett and his team at Berkshire Hathaway manage to successfully close the deal, which is still subject to regulatory approvals.

If for some reason the deal falls apart, an investor buying NV Energy's shares today will be at risk for a capital loss of significantly more than $0.06 per share. The reason for that risk is the fact that Berkshire Hathaway's acquisition price values NV Energy at around $5.6 billion. That's around 12% above the $5.0 billion valuation estimate NV Energy looked to be worth last December when it was selected for the real-money Inflation-Protected Income Growth portfolio.

Did Buffett overpay?
That valuation discrepancy may seem out of sorts for a noted value-oriented investor like Buffett and the Berkshire Hathaway conglomerate he controls. In reality, though, it's probably a reasonable price to pay for NV Energy, given that it will be integrated with Berkshire's MidAmerican Energy unit.

A lot of work goes into managing, maintaining, and operating an electric company. By integrating NV Energy with the much larger MidAmerican, MidAmerican can achieve operational efficiencies and other cost reductions that NV Energy couldn't get on its own. That makes NV Energy worth more to MidAmerican than it was as a stand-alone company, making the acquisition price reasonable.

What are new stock buyers thinking?
Still, while $23.75 may be a fair price for Berkshire to pay for NV Energy, that doesn't mean it makes sense for retail investors to pay $23.81 for those shares today. Indeed, there is only one possible reason it may make a little bit of sense for someone to pay $23.81 for NV Energy stock: its dividend. NV Energy has maintained its $0.19-per-share dividend, payable on December 18.

Investors paying $23.81 per share now will get that $0.19 dividend before being forced to turn around and sell the shares at $23.75. In addition, depending on when the acquisition closes (and if NV Energy continues to maintain its dividend), investors may get a dividend in the first quarter of 2014 as well. Put it all together, and with enough shares bought for a low enough commission, there's a chance of winding up with a net positive total return on an investment in spite of the capital loss.

Better dividends for your money
Still, that seems like an expensive and potentially risky way to pick up a return that amounts to somewhere in the neighborhood of 1%. It does, however, show just what lengths investors will go to in order to find investing income in today's low-interest rate environment.

Dividends really do make a difference to investors' returns. Over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. While NV Energy won't be around long enough for new investors to see those benefits, other great dividend-paying companies will.

With this in mind, some of The Motley Fool's top analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

To follow the iPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the iPIG portfolio, simply click here.

The article Warren Buffett Guarantees You a Capital Loss originally appeared on Fool.com.

Chuck Saletta owns shares of NV Energy. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published