“One of the three most profitable multibillion-dollar companies in the U.S., and a brilliant performer in a dull stock market, Teledyne, Inc. is a unique company. In no way more than in style and contrary thinking of the man who runs it.” — Forbes July 9, 1979.
Dr. Henry E. Singleton was one of the most efficient business operators, capital allocators and great minds of the last century. Over a few decades Singleton took a struggling military contractor and turned it into one of America’s largest conglomerates. During 1979, near the height of Singleton, and Teledyne’s success, Forbes Magazine ran a profile on Singleton’s business empire, detailing how he’d managed to achieve such a staggering performance over the years. This is a short summary of that profile.
The singular Henry Singleton
"His record speaks for itself. Until 1960 Teledyne did not even exist. Five years ago, when it was barely 14 years old, it ranked 202nd among major U.S. corporations listed in Forbes' Profits 500. Year by year it has climbed the in the Forbes lists and last year stood [at] number 68, an upstart that had climbed over the heads of great American corporations like International Paper, Avon Products, Texas Instruments, Ingersoll-Rand. When the 1979 listings come out next year, Teledyne is almost guaranteed to have moved up several more rungs on the profits ladder." -- Forbes July 9, 1979.
Teledyne's growth was nothing short of impressive. The company reported revenues of $1.2 billion for 1970. By 1974, revenues hit $1.7 billion. Two years later, revenues had jumped a further 12% to $1.9 billion and by 1979, revenues surged to over $2.6 billion. From 1969 through to 1978, Teledyne’s revenue jumped 89%, net profit more than triple and earnings per share, thanks to constant tender offers and buybacks, soared 1,226%.
Known as the ‘master of capital allocation’, Henry Singleton made as much use as possible of Mr. Market’s (Singleton’s view of the market was based on a similar view presented by the Godfather of value investing Benjamin Graham) unpredictable and manic depressive nature while he was running Teledyne. During the 1960s, Singleton used what he called ‘Chinese paper’, or Teledyne’s own, high-priced stock, in other words, to buy up around 125 (or 145, or 130 there are several different estimates) companies to bolt-on to Teledyne. And Most of these companies were left to their own devices after being acquired and as long as the companies were generating cash, Henry Singleton didn't interfere.
Indeed, the group was run using a bottom-up approach. Each business acquired was left under the control of the existing management team already in place and reported to one of several ‘small profit centers’, which then reported to upper management.
And Teledyne liked to split businesses up, often into companies with only a few million dollars in annual sales. The thesis behind this fragmentation was to try and uncover problems that would have been overlooked if the company were part of a larger group within the Teledyne conglomerate. Splitting up businesses also reduced the chance that the failure of a single business unit would bring down the whole Teledyne empire.
Henry Singleton: Turnaround master
Henry Singleton was a master at turning around business performance. Over Teledyne's life, many of the conglomerates businesses ran into trouble (Teledyne itself was struggling to survive when Singleton first acquired the company) but Singleton always managed to turn the firms around and rebuild sales.
For example, Packard Bell, which was at the time part of the Teledyne empire, made a huge mistake trying to break into the personal television market, and losses followed. Under Singleton’s guidance, the division dropped loss-making products and focused on the remaining profitable products. Profits soon surged to an all-time high.
Another Teledyne business, Argonaut Insurance hit the rocks after it became entangled in a series of medical malpractice lawsuits. $104 million write-off followed, and Singleton stepped in. Argonaut dropped its medical division and focused on writing other lines of business. Once again, profits soon rose to record levels.
However, during the 70s, Teledyne’s stock lost its appeal and started to fall. Investors were also concerned about antitrust regulators scrutiny of conglomerates. But Henry Singleton, the master of capital allocation saw no reason to be worried. So, with a falling stock price he stopped buying other companies, and Teledyne started buying back its own stock.
“In October 1972 we tendered for 1 million shares and 8.9 million came in. We took them all at $20 and figured that was a fluke and that we couldn't do it again. But instead of going up, our stock went down. So we kept tendering, first at $14 and then doing two bonds-for-stock swaps. Every time one tender was over the stock would go down, and we’d tender again and we’d get a new deluge. Then two more tenders at $18 and $40.”
Henry Singleton: No dividend
As he was buying back stock, Henry Singleton famously refused to pay a dividend to Teledyne's shareholders. Singleton's logic was simple, he believe that shareholders wouldn’t look after the cash effectively, so it was better to keep the cash in the business and use it for tender offers and debt payments. After all, Teledyne could reinvest earnings at over 30%; a higher rate than could be achieved elsewhere.
“To begin with he asks, what would the stockholder do with the money? Spend it? Teledyne is not an income stock. Reinvest it? Since Teledyne earns 33% on equity he argues, he can reinvest it better for them than they could themselves. Besides, the profits have already been taxed; paid out as dividends they get taxed a second time. Why subject the stockholders money to double taxation?...
…Singleton says: “Our people don’t want any more income. They want to see increases in the book value and ultimately in the price of the stock when the underlying buildup in values is reflected”...-- Forbes 1979.
Henry Singleton, the mast of capital allocation, was spot on the money, investors wouldn't have been able to achieve a better return anywhere else.
Teledyne's stock returned an average of 17.9% per annum for two-and-a-half decades -- a 53x return on invested capital vs. 6.7x for the S&P 500, 9.0x for GE and 7.1x for other comparable conglomerates. Further, Teledyne’s earnings soared 11 times faster than the average Dow Jones stock.
And these returns were generated the old-fashioned way; with a robust, sustainable free cash flow. True, Teledyne did borrow heavily during its tender offers but borrowings were soon repaid with free cash flow.
For 1979, the year of the Forbes interview, the company was planning to spend only $100m, or a third of operating cash flow on capital spending despite reporting revenues of around $2 billion.
The Singular Henry Singleton, Forbes, July 9, 1979.