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.