Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Bargain hunters might want to pay attention to an often-overlooked number – retained earnings – among the beaten down rubble in the stock market.

It’s a somewhat dry term for the cash a company has left after covering all its costs, including dividends paid to shareholders.

Companies that report retained earnings show they are generating extra cash they can use to reinvest in their business, a positive sign about management performance, especially in turbulent economic times such as now when cash on hand and cash generation seem more important than ever.

Story continues below advertisement

Warren Buffett will hold a truncated virtual annual meeting on Saturday to share his wisdom on investing in these troubled times. He spent some time writing about the importance of retained earnings in his annual letter to shareholders earlier this year.

Investors can use retained earnings as a way to evaluate how well management performs. As Mr. Buffett sees it, a management that can get an above-average return on its retained earnings is a good investment for his company, Berkshire Hathaway Inc., and its shareholders.

How a company uses its cash depends on the nature of its business. Industrial companies have to spend on new plants and equipment to keep up operations, and that can eat away at retained earnings. Other companies don’t have heavy equipment costs and can use that money to buy other companies or otherwise generate growth.

Investors can judge how well management handles this task by comparing the total profit per share retained with the change in profit per share over a given time.

Mr. Buffett uses Berkshire’s own balance sheet to make his point. Berkshire doesn’t pay dividends and only recently began to return money to shareholders in the form of stock buybacks. That means it uses its retained earnings to buy controlling stakes in companies, acquire non-controlling stakes in public equities or make capital investments among other things internal to the company.

Berkshire’s retained earnings have helped Mr. Buffett amass more than US$120-billion in cash he can deploy. Berkshire looks to buy companies that have good returns on net tangible capital, good management and attractive market values relative to intrinsic value. Berkshire buys private companies outright and also has a good portion of its assets invested in public stocks, roughly US$185-billion invested in approximately 50 blue-chip companies, including names such as Apple Inc. and Bank of America Corp.

As Mr. Buffett points out, there are different ways to recognize the value of the assets Berkshire owns. Berkshire accounts directly for the earnings of the businesses it owns outright, but it only reports dividend income from the stocks it holds in its portfolio of public stocks. The retained earnings of each of those portfolio stocks isn’t immediately recognized.

Story continues below advertisement

That means Berkshire's shareholders are getting extra value that isn't realized.

Mr. Buffett showed Berkshire’s top 10 stock holdings and broke down their contributions in terms of dividends and the retained earnings estimated to be Berkshire’s portion. The portfolio of these 10 stocks generated US$3.7-billion in dividends, but more than double that from retained earnings, US$8.33-billion.

In Apple shares, for example, Berkshire recorded US$773-million in dividends and US$2.5-billion in retained earnings attributable to Berkshire. In Bank of America, the breakdown was US$682-million and US$2.1-billion. Berkshire held 5.7 per cent of Apple stock as of the end of 2019 and 10.7 per cent of Bank of America.

Whether Berkshire shareholders will ever fully realize the value of those retained earnings remains to be seen, of course. The companies use that money to reinvest, acquire or make payouts to shareholders just like Berkshire does and, at least in the short-to-possibly mid-term, earnings may be non-existent or far lower for most companies because of COVID-19 and the seizing up of the global economic engine.

“Sometimes, alas, retentions produce nothing,” Mr. Buffett said in his letter. “But both logic and our past experience indicate that from the group we will realize capital gains at least equal to – and probably better than – the earnings of ours that they retained.”

Even in the most uncertain times such as now, buying good businesses, using logic and understanding history are the things investors can rely on in order to be successful over time. The accompanying table contains five U.S. stocks and five Canadian stocks, sourced from my quantitative models on Validea and Validea Canada, that score highly according to my Buffett-based model. All of these names have attractive valuations and at least 12 per cent long-term returns on retained earnings – an important characteristic based on Mr. Buffett’s message to long-term investors.

Story continues below advertisement

High-scoring stocks according to Buffett-based model

NameTicker$ Price
(Apr. 22)
Mkt Cap
U.S. stocks
UnitedHealth Group Inc.UNH-N 277.02 262,456 19.425.3%1.6%
Tractor Supply Co.TSCO-Q 95.43 11,072 20.512.3%1.5%
Biogen Inc.BIIB-Q 298.01 49,496 9.521.3%n/a
Mastercard Inc.MA-N 256.91 255,441 32.523.8%0.6%
Apple Inc.AAPL-Q 276.10 1,208,070 21.811.4%1.1%
Cdn stocks
CI Financial Corp.CIX-T 13.79 3,065 9.57.5%5.2%
IGM Financial Inc.IGM-T 26.90 9,230 12.31.1%5.8%
Metro Inc.MRU-T 60.02 15,164 19.339.8%1.0%
Constellation Software Inc.CSU-T 1,346.63 28,441 61.633.2%0.4%
Canadian National Railway Co.CNR-T 109.08 77,890 20.111.6%2.0%


U.S. stocks in USD; Canadian stocks in CAD.

John Reese is chief executive officer of and Validea Capital, the manager of an actively managed ETF. Globe Investor has a distribution agreement with, a premium Canadian stock screen service.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies