Gann, the position you are arguing has a certain correct internal logic to it in that, yes, dividends paid are money gone. However the weakness of your calculations is that you need to make the assumption of a relatively static and efficient system which is not the market.
The market is rarely static, it is inefficient and very often stupid (not unlike management economics) and the rules described do not necessarily define real value.
Take the case of the two examples you mention. Over the last 12 months ZFX has massively increased earnings, capital appreciation and dividend return. BHP has increased earnings also but had much more moderate capital appreciation and poor dividend return. $ 1 invested in ZFX at the start of 2006 would have done you a great deal better than $1 invested in BHP at the same time - on all measures. (Also consider that after going ex-dividend on the last full year the share price actually increased significantly).
According to the theory you describe this should not have happened but it did. Why? Is it just an aberration or does the market have some other issue in mind? I think the latter, namely question of mine life, but it is important to note that there are a number of periods already that ZFX has traded at higher PEs than at present or even on your adjusted basis.
This question of mine life highlights the second weakness in your understanding (which reflects the markets and analysts flawed understanding) of ZFX capital return policies vs reinvestment. First up I must state that I personally believe ZFX should have returned less capital to investors over the last 12 months but I do not think they have done the wrong thing in having done so.
The ZFX position is that as managers of capital on behalf of shareholders they have a responsibility to utilise that capital unless they cannot get a better return for shareholders than the shareholders can get themselves. This fits the mould of Warren Buffett in many ways.
ZFX are committed to not over paying for acquisitions and clearly have been of the view that, until recently, there have been few or no quality value opportunities for acquisition thus appropriate to return some capital to shareholders (but not all). But they have put extensive effort into reinvestment and growth activities - both internally (with money spent on extending Century as well as advancing Dugald River) and externally via their brilliant exploration strategy by joint ventures - low cost, low risk but high exposure to quality prospects. An important element of this strategy is the capital flexibility it provides. Then of course there is the recent commencement of acquisition of Wolfenden which looks outstanding value. There will be more of these which will begin to secure ZFXs future as a significant mining house.
I am very much an admirer of BHP as well but frankly the market's understanding of ZFXs business model is highly flawed and their PE, actual or artificially adjusted, reflects the typical ignorance. They are not quite the bargain they were this time last year but still offer excellent future value to smart investors imo. One day in the future people will switch on and suddenly realise that ZFX has built an outstanding portfolio of assets and wonder why they were so cheap.
ZFX
zinifex limited
