6 Great Investors Explain What Makes Stocks Rise via Barron’s
Michael Mauboussin, Managing director, Global Financial Strategies, Credit Suisse: Capital allocation is especially relevant today, said Mauboussin, because “return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.” Yet, very few CEOs are trained in what is senior management’s most fundamental responsibility.
The proclivity to return cash to shareholders hasn’t changed over the decades, Mauboussin said, although the means have shifted to favor buybacks over dividends. But price and value ought to be the determinants of any capital-allocation decision. A dividend treats all shareholders alike, he observed, whereas management that buys back overvalued stock benefits only the sellers.
Bruce Greenwald, Professor at Columbia Business School and academic director of Columbia’s Robert Heilbrunn Center for Graham & Dodd Investing: Greenwald noted that human-resources management too often is given short shrift by companies, and ought to be included in the capital-allocation mix. In particular, he singled out succession planning as “something done badly,” even by good managers. “Without good succession planning, the only place your [price/earnings] multiple has to go is down,” he said.
Meryl Witmer, General partner, Eagle Capital Partners: Witmer, also a Roundtable member, called out those who are “pro-buyback at any price” on the logic that reduced share count boosts earnings per share. “I view that as returning capital to ex-shareholders,” she said. “Paying too much to buy back shares isn’t helpful to the overall enterprise or the remaining shareholders.”
Witmer often invests in new spinoffs, whose value hasn’t yet been recognized by the market. “A spinoff is a great opportunity to educate a new CEO about the importance of capital allocation,” she said.
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