Investment Ideas – Great Capital Allocators

A follow-up in the Investment Ideas series of posts. Be sure to check out my earlier post on Family Owned Businesses as a method of screening and finding good investment opportunities in this series.

Good capital allocation is the most important trait for a company. Generally speaking, a company has a handful of options:

  • Reinvest in the business
  • Pay down debt
  • Pay dividend
  • Buyback stock
  • M&A to grow the business

While this may appear to be a simple list, the reality is that most executives and board of directors fail at a good long term strategy. In fact most executives do not possess the expertise or experience at good capital allocation strategies.

Due to the dynamic nature of economic cycles and the investment options available, it may also mean that the priorities change from time to time and shareholder expectations may need to be addressed. For e.g., buyback amounts can be waxed and waned through an economic cycle, but when it comes to dividends shareholders expect the company to maintain the amount or pay even higher dividend amounts going forward.

There are some great capital allocators in the corporate world. Companies like Berkshire Hathaway (BRK.A, BRK.B), Constellation Software (TSE: CSU), Brookfield Asset Management (TSE: BAM.A), Texas Instruments (TXN) have demonstrated that they are extremely adept at capital allocation strategies. In fact, this presentation from Philip Ordway @ Anabatic Investment Partners is a gem and highlights some of the principles to look for in great capital allocators.

I invite you to explore this chartdeck. Although not an exhaustive list, the presentation highlights the following companies as ‘Capital Allocation All-Stars’. Hopefully someone will launch an ETF with these names 🙂

Do you pay attention to the management’s capital allocation strategies? Do you have any other companies that you consider great capital allocators not listed above? Share your thoughts below.

4 thoughts on “Investment Ideas – Great Capital Allocators

  1. great post and list of companies road.

    I think magna should also make the cut, they have been very shareholder friendly. Increasing the dividend while also reducing the amount of shares outstanding by alot.

    I have thought about adding them but i think we are near (or at) the top of the auto cycle and maybe the price will be even better in the next yr etc.

    cheers Road.

    • I guess most public companies out there these days are shareholder friendly, else they get activists on their hands greenmailing them. I used to be a shareholder at Magna, but ended up selling a couple of years ago. Interesting point and I wonder if it does count as one of the good capital allocators. Thx for sharing your thoughts

      R2R

  2. JC says:

    NFLX seems to be misplaced here. IIRC they’ve been taking on huge amounts of debt but they’ve been investing heavily into the business through their original content. I’d be interested to see why Phillip considers NFLX to be a capital allocation all star if he has more information.

    I do try to look at what management says their capital allocation plan is as well as whether they’re actually meeting those goals. One of the quickest checks for management with value at the forefront is buybacks that are very chunky or come and go as opposed to just buying because they said they’d buy back $5 B this year or next quarter…

    • Yeah I was intrigued a bit by NFLX too — wonder what the thought process behind that was. I would be very interested to see the thought process too. The execs definitely have the grit and disrupted the industry really well putting Blockbuster out of business. The debt load is one concern I have for NFLX and so far they’ve had the pricing power — but with the onset of competition coming from DIS, HBO etc, I wonder if they can defend that moat well.

      Yeah thats a good measure to have. Just announcements dont count. It was one of the reasons I dumped QCOM a few years ago — the headlines was that they were going to buyback a lot of shares and the media hyped it, but silently they were also issuing shares and diluting the shareholders. Coupled that with record exec pay, it was setting off too many red flags for me.

      R2R

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