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September 26 - October 24, 2022
Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity.
Meek told me a story about a bartender at one of the management retreats who made a handsome return by buying Capital Cities stock in the early 1970s.
From 1971 to 1984, Singleton bought back huge chunks of Teledyne’s stock at low P/Es while revenues and net income continued to grow, resulting in an astonishing fortyfold increase in earnings per share.
Singleton, who, earlier in his career when he was building Teledyne, had been an active and highly effective issuer of stock. Great investors (and capital allocators) must be able to both sell high and buy low; the average price-to-earnings ratio for Teledyne’s stock issuances was over 25; in contrast, the average multiple for his repurchases was under 8.
One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.
As he conducted thorough interviews with top executives prior to becoming CEO, he found a deeply ingrained engineering mind-set with a relentless focus on the development of “larger, faster, more lethal” weapons and little concern for shareholders, a stark contrast with GE.
After extensive financial modeling, he concluded that AT&T should increase its debt level and aggressively reduce its equity base through share repurchases.
Steve Ross of Warner Communications and Bob Magness of Tele-Communications Inc. (TCI). Despite a salary that was 60 percent lower than Ross’s offer, he chose TCI because Magness offered him a larger equity opportunity and because his wife preferred the relative calm of Denver to the frenetic pace of Manhattan.
There is an apparent inverse correlation between the construction of elaborate new headquarters buildings and investor returns.
‘I probably wouldn’t do that for these reasons, but I’ll support whatever you decide.’”
“The hurdle we always used for investment decisions was the share repurchase return. If an acquisition, with some certainty, could beat that return, it was worth doing.”3 Conversely, if a potential acquisition’s returns didn’t meaningfully exceed the buyback return, Stiritz passed.
He believed that charisma was overrated as a managerial attribute and that analytical skill was a critical prerequisite for a CEO and the key to independent thinking: “Without it, chief executives are at the mercy of their bankers and CFOs.”
He was well known for showing up alone to important due diligence meetings or negotiations where the other side of the table was crowded with bankers and lawyers.
A dollar invested with Dick Smith at the beginning of 1962 would have been worth $684 at the end of the period. That same dollar invested in the S&P would have been worth $43, and $60 if invested with GE.
Buffett bought his first share of Berkshire for $7; today it trades for over $120,000 a share.
He never looks at the forecasts provided by intermediaries, preferring instead to focus on historical financial statements and make his own projections.
He summarizes this approach to management as “hire well, manage little” and believes this extreme form of decentralization increases the overall efficiency of the organization by reducing overhead and releasing entrepreneurial energy.
They focused on the key assumptions, did not believe in overly detailed spreadsheets, and performed the analysis themselves, not relying on subordinates or advisers.
4. Calculate the return for stock repurchases. Require that acquisition returns meaningfully exceed this benchmark. Comment: While stock buybacks were a significant source of value creation for these outsider CEOs, they are not a panacea. Repurchases can also destroy value if they are made at exorbitant prices.
