“Ask and it will be given to you; seek and you will find; knock and the door will be opened to you. For everyone who asks receives; the one who seeks finds; and to the one who knocks, the door will be opened. Matthew 7:7-8

13 Apr 2017


Hi Friends,    Seven  areas that we look into when evaluating company management: 

Have most investments and acquisitions been in line with the company’s core competencies, or does management like to make diversifying acquisitions?  All else equal, we prefer companies to stick with what they know best and strengthen their core businesses rather than engage in conglomerate building.  Good stewards of shareholder capital might also have a record of selling non-core businesses at good to fair prices.

Have investments and acquisitions been moat-widening?  In other words, have returns on invested capital or profit margins improved  as a result of management’s decisions?  A strong sign of good stewardship is that management’s capital-allocation decisions improved the company’s competitive position and consequently increased shareholder value.

Does the company have a record of taking large impairment charges?  Poor stewards of shareholder capital frequently need to write down the value of previous acquisitions and probably need to improve their M&A decision-making processes.  Exemplary stewards consistently pay good to fair prices for their acquisitions.

Is management’s investment focus on building long-term shareholder value, or has it engaged in a growth-for-growth’s sake strategy?  Investment decisions that provide both short-and long term benefits are ideal, but exemplary stewards of shareholder capital should be willing to sacrifice short-term results to create long-term shareholder value.  Poor stewards, on the other hand, have a myopic focus on short-term results and have less concern for long-term consequences.

Does the firm have a history of cost overruns or expensive operational missteps?  Our methodology doesn’t punish companies for a string of bad luck.  Instead, we’re more interested in how management’s actions and decision-making process may have played a role in value-destructive events.  Poor stewards of shareholder capital will have a habit of not correcting their mistakes, whereas exemplary stewards consistently avoid repetitive and costly mistakes and quickly fix those that they do make.

Does the firm have the appropriate dividend and buyback policy?  The common traits of a good dividend policy are consistency, affordability and transparency.  All else equal, firms in cyclical and capital-intensive businesses and those with significant value-enhancing investment opportunities should pay out a smaller percentage of earnings compared with firms in defensive industries or those with fewer reinvestment opportunities.  As any successful investor would do, exemplary stewards look to opportunistically repurchase shares when the stock is trading at a material discount to fair value.  We don’t like to see executives using buybacks simply as a means of increasing earnings per share or offsetting dilution related to employee stock options with little regard for the price paid.

Does the firm have an appropriate amount of debt given the cyclicality and capital intensity of its business?  We look unfavourably on firms with leverage ratios capital-intensive industries shouldn’t carry a large debt load, as this will serve to exaggerate the inherent volatility in the business.  Similarly, firms in mature industries that carry no debt and have few reinvestment needs may not be maximising shareholder value, as issuing debt could lower the firm’s cost of capital.

Seven questions above should help you understand how well management is allocating capital.  Please contact always your financial professional before making an investment decision.

Good  Luck.                                                                             See You Later.

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