CAPITAL ALLOCATION & BUYBACKS

“Capital allocation is the CEO’s most important job.” William Thorndike

“Managers who are paid handsomely to misallocate capital will do so. Incentives matter.” Pat Dorsey

“If you buy something with a 10% free cash flow yield and hold it for 3 years, management is going to be responsible for allocating a third of the value of the company over that time. You have to really care about that.” Adam Weiss

"The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another.” Warren Buffett

"Given the long-term nature of our investment approach, capital allocation is of paramount importance." Marathon Asset Management

"After ten years in the job, a CEO whose company retains earnings equal to 10% of net worth, will have been responsible for the deployment of more than 60% of all capital at work in the business.” Warren Buffett

“I want to know in allocating the company’s capital specifically how they rank paying a dividend, making acquisitions or investing in organic growth.” Carlo Cannell

“One major factor we analyse is capital allocation. If the company generates a lot of free cash flow and the management proceeds to waste it, that free cash flow has no value to investors.” Andrew Wellington

“The companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies existed between price and value.” Warren Buffett

"Effective capital allocation...requires a certain temperament. To be successful you have to think like an investor, dispassionately and probabilistically, with a certain coolness" Michael Mauboussin

"The best capital allocators are practical, opportunistic, and flexible. They are not bound by ideology or strategy." William Thorndike

“Capital allocation is fundamental.” Mohnish Pabrai

“Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.” Warren Buffett

"Over a period of years, our thinking has focused more and more on the issue of reinvestment as the single most critical ingredient in a successful investment idea, once you have already identified an outstanding business." Chuck Akre

“One of the most important attributes we look for in portfolio candidates is long reinvestment runways.” Jake Rosser

“Alongside a strong business model and exceptional people, abundant reinvestment opportunities are the key to high rates of compounding returns.” Chuck Akre

“We think management’s reinvestment acumen is something Wall Street doesn’t adequately value. Most investors develop linear earnings models to arrive at price targets, but because the view is usually so short term, they’re more likely to miss the extent to which smart capital allocators can create real compound value over five, ten, fifteen or more years." Peter Keefe

“I learned early on how truly valuable – and rare – it is to find skilled and creative management teams and boards with a clear and rational approach to capital allocation.” Jason Stankowski

“Substantial research has long shown that firms that issue new stock tend to underperform the market in subsequent years while those who buy back their own stock tend to outperform.” Andy Redleaf

“While goodwill write-offs are non-cash, they can indicate just horrendous capital allocation.”

“I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value creation of stock buybacks.” Lee Ainslie

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases." Warren Buffett

“Our preference is for companies to employ cash for buybacks because we believe every stock we own is under-valued.” Andrew Wellington

“Capital allocation decisions are amongst the most important decisions which management of companies make on behalf of shareholders.” Terry Smith

“As long as you’re doing something that doesn’t harm the value of the company, accelerating the benefits to shareholders is exactly what creating value is about. The best example, of course, is buying back stock. If you have a great long-term story and a value creating plan ahead of you, why would you wait and buy back stock after the market fully reflects the value? From a capital allocation standpoint, you want to buy back stock ahead of all that.” Scott Ostfeld

“The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model.” Jim Chanos

"In allocating capital, activity does not correlate with achievement. Indeed, in the fields of investments and acquisitions, frenetic behaviour is often counterproductive." Warren Buffett

“Over the medium term, return on capital is generally determined by the CEO’s decisions about capital expenditure, mergers and acquisitions activity, and the level of equity and debt used to finance the business.” Marathon Asset Management

"The most important thing management does is allocate capital." Jonathan Shapiro

“Good capital allocation takes many forms and does not necessarily require a firm to grow. At National Indemnity (an insurance subsidiary of Berkshire Hathaway), the firm’s ability to write insurance only when pricing is good and stand back when pricing is poor, is a wonderful example of capital discipline and good capital allocation. After all, why grow if returns are going to be poor? However, surprisingly few companies have the strength to just sit it out, or shrink, as the pressure to grow is often overwhelming. The clamour comes from within the company (reinforced by poorly constructed incentive compensation), Wall Street promoters and short-term shareholders.” Nick Sleep

"Understanding intrinsic value is as important for managers as it is for investors. When managers are making capital allocation decisions—including decisions to repurchase shares—it’s vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated. And, when misallocations occur, shareholders are hurt." Warren Buffett

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail only a year or two earlier to a board. And they don’t want to actually stick the figures up there as to how the reality worked out relative to the projections. That’s human nature.” Warren Buffett

"Because management's capital allocation decisions have such an important impact on the value created over our expected five to ten year holding period, we pay careful attention to their historical track record and want to hear that they have a rational framework for making decisions.” Brian Macauley

"CEO's who recognise their lack of capital-allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants, or investment bankers. Charlie [Munger] and I have frequently observed the consequences of such ‘help’. On balance, we feel it is more likely to accentuate the capital allocation problem than to solve it." Warren Buffett

"Two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders. Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools." William Thorndike

"What we want is very large discounts to intrinsic value with great capital allocators." Mohnish Pabrai

"Our flexibility in respect to capital allocation has accounted for much of our progress to date." Warren Buffett

"I look for businesses with capacity to reinvest. " Thomas Russo

“When we’re talking to company management about their business, the single most important area of discussion is the allocation of capital. Every year, these companies – the ones that we own – have got this lovely return, about 30% of return on capital. So, for every dollar of their capital we own – or a pound or a euro – up comes 30 pence or cents. But then our question is, what do you do with it and why? The best answer of all is ‘I’ve got something invested in this business where I can get another 30% return.’ That’s a great answer. The less-good answers are, ‘I can find something to buy.’ On average, that doesn’t work. There are examples where it does, but it is a more testing kind of situation. And then the final one is, ‘we will distribute it to you.’ At which point we’ve got a subset which is, well, how do you distribute it? You can distribute it by dividend or a share buyback. And we’d like to know how you choose between those two things. Because people go, ‘Oh, share buyback is great value.’ Well, they only do if you’re buying the shares below their intrinsic worth. And the other thing you have to remember about share buybacks is that people say, ‘Well, I’m returning capital to shareholders.’ Now, to be more exact, you’re returning it to exiting shareholders. And since, by and large, we’re going to be not exiting shareholders, we’d like to know that you’re buying those shares not above intrinsic value, where you’re transferring value from us, who are going to stay put, to those people over there who are leaving.” Terry Smith

“When we control a company we get to allocate capital, whereas we are likely to have little or nothing to say about this process with marketable holdings. This point can be important because the heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it's as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve.” Warren Buffett

“A big topic of conversation is always capital allocation. We’re looking for the discipline to only invest for a return on a risk-adjusted basis that is very attractive and consistent with historical levels. Not having a clear basis for making decisions, or using rules like, ‘We’re looking to earn 200 basis points above our cost of capital,’ are obvious red flags.” Peter Keefe

"A textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business." Warren Buffett

“Most C-Suites are terrible at capital allocation and dreadful at value-destroying share buybacks.” David Rolfe

“Another common thread among exceptional managers is clarity of thought when it comes to reinvestment decisions. In our experience, poor capital allocation decisions can destroy more value, more quickly, than any other management action. Disappointingly, we often discover that managers who excel at running their businesses fall victim to ‘fuzzy thinking’ on the issue of capital allocation.” Chris Cerrone

“Reinvestment is the engine of the growth that we covet from your holdings. Managements who underinvest to avoid inevitable burden on reported short-term profits, generated by investments intended to deliver long-term growth in intrinsic value, inevitably under-deliver on potential growth.” Thomas Russo

“Sometimes we are asked what it is we do all day – given we are not trading in and out of our holdings. One answer is that we are watching very closely the capital allocation decisions taken by the boards of the companies we hold – knowing that cumulatively and over time it is the calibre of those decisions that will determine the long term success, or otherwise, of our own investment decisions, made with your capital.” Nick Train

“Our most common mistake is to misjudge capital allocation decisions by our companies: firms which articulate a share repurchase/debt repayment strategy and have incentives to reinforce that outcome, throw caution to the wind and make acquisitions instead. Capital mistakes such as these prevent the compounding of value.. The prime determinants of outcome are price (sticking to 50 cents on the dollar) and capital allocation by management. The first is in our control, that is it is in our control to be patient and wait for the right price. The second involves a subjective judgement about the quality of management, and an assessment about the sustainability of business returns in the long run. It is these factors that occupy almost all our time.” Nick Sleep

“Another crucial factor in determining the attractiveness of a company is its ability to allocate capital intelligently. Funds generated from operations can be plowed back into the business, invested in other ventures, or returned to shareholders. Enterprises that deploy cash well create value for owners, while those that do it poorly destroy wealth.” David Abrams

“Most directors have little actual experience in capital allocation yet are asked to make decisions on the topic at virtually every board meeting.’ Dan Loeb

“Dividend holidays are one thing and can be temporary, but far more serious is to issue permanent capital at depressed share levels. The dilution is a significant drag on eventual earnings recovery and should not be contemplated lightly.” Nick Train

"Dilution risk occurs when companies issue equity at less than the firm is worth. This risk is always with us, but it is most pernicious at stock market troughs." Nick Sleep

“Good capital allocation is crucial; a wonderful business and a talented CEO is not enough to offset poor capital allocation. Too many companies repurchase shares above intrinsic value, pursue value destructive mergers and acquisitions, or fail to adapt their capital allocation in response to changing conditions or emergent opportunities. Capital allocation is one of the most important parts of the track record that must be examined by prospective investors.” Todd Combs

BUYBACKS

“Buybacks are divisive. They divide people who do understand finance from those who don’t.” Ken French

“Repurchases - is sensible [allocation of capital] for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value. Indeed, disciplined repurchases are the surest way to use funds intelligently. It’s hard to go wrong when you’re buying dollar bills for 80c or less. But never forget: In repurchase decisions: price is all important. Value is destroyed when purchases are made above intrinsic value.” Warren Buffett

“Analysts tend to be cheer-leaders for corporate re-purchase programs. In my view, these programs only make sense under one condition – the company is buying back shares that are significantly under-valued. Most management teams have demonstrated the total inability to understand what their businesses are worth. They’re buying when the stock is up, and have no courage to buy when the stock is down.” Leon Cooperman

"My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, 'What is smart at one price is stupid at another'." Warren Buffett

“When the board of directors of a company decides to buy-back its stock in the open market, it may well be a sign that they believe the shares are undervalued and do not adequately reflect the prospect for growth. They feel that the best return on corporate cash is by buying up their own shares in the marketplace.” Christopher Browne

“[CEO] views on share buy-backs can also be highly informative. Very few CEO’s see this as a legitimate investment on par with capital expenditure or M&A decisions, presumably due to an aversion to shrinking any aspect of the company. Many fear that buybacks are an admission that the company has run out of investment ideas. On this subject we like to hear managers justify buybacks based on an internal valuation model, as this can then lead to an interesting discussion about valuation of their business.” Marathon Asset Management

“The companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies exist between price and value. As shareholders, we find this encouraging and rewarding.” Warren Buffett

"I look more favourably if a company is doing significant buybacks. That actually adds something to the equation for me. The dividends particularly are not of interest." Mohnish Pabrai

“The only reason we’ll buy in stock is because we think it’s cheap. That is not standard practice in corporate America at all. In fact, corporate America, to some extent, buys in their stock more aggressively when it’s high than when it’s low. But they may have some equation in their mind that escapes my reasoning power.” Warren Buffett

“At the core of their [the Outsider CEO’s ] shared worldview was the belief that the primary goal for any CEO was to optimize long term value per share, not organizational growth.. This may seem like an obvious objective, however, in American business, there is a deeply ingrained urge to get bigger. Larger companies get more attention in the press, the executives of those companies tend to earn higher salaries and are more likely to be asked to join prestigious boards. As a result, it is very rare to see a company pro-actively shrink itself. And yet virtually all of these CEO’s shrank their share bases significantly through repurchases.” William Thorndike [The Outsider CEO’s]

“I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value creation of stock buybacks.” Lee Ainslie

"Buying back shares is the simplest and best way a company can reward its investors. If a company has faith in its own future, then why shouldn't it invest in itself, just as the shareholders do?" Peter Lynch

“Our preference is for companies to employ cash for buybacks because we believe every stock we own is under-valued.” Andrew Wellington

"Pay close attention to the cannibals – the businesses that are eating themselves by buying back their stock." Charlie Munger

“As long as you’re doing something that doesn’t harm the value of the company, accelerating the benefits to shareholders is exactly what creating value is about. The best example, of course, is buying back stock. If you have a great long-term story and a value creating plan ahead of you, why would you wait and buy back stock after the market fully reflects the value? From a capital allocation standpoint, you want to buy back stock ahead of all that.” Scott Ostfeld

“Buying-in shares can be a smart tactic if a company is flush with cash and the stock is in the tank. As Warren Buffett once noted, who wouldn’t jump at the chance to buy out his partners as 50 cents in the dollar? And of course, as the number of shares being traded shrinks, the percentage of a controlling stake expands. Buying-in shares is another thing entirely, however, when shares are selling at or near historic highs and priced at many times earnings. Worse is for a company to take on debt in the process, as some companies have done to make purchases, because when the stock falls, the company is left with increased debt and diminished capital.” Leon Levy

“What is universally absent from press and analytical commentary on share buybacks is any discussion of the price at which they are executed, the returns which this implies for the remaining shareholders who are in effect funding the repurchase, and whether they therefore create or destroy value… Share buybacks only create value if the shares repurchased are trading below intrinsic value and there is no better use for the cash which would generate a higher return.” Terry Smith

"When your business is not doing well from a fundamental perspective, the last thing you're supposed to do is buy back stock." Marc Cohodes

“We only believe in repurchasing shares when we can do so at a significant discount from intrinsic value. Some companies talk about — Coca-Cola does — they talk about buying in shares to cover options. That actually isn’t the best reason to buy in shares. I mean, the stock could be overpriced, and even though you issued on options, you shouldn’t be buying it in. If you buy shares — if you buy a dollar bill for 90 cents, you’re doing your shareholders a favor. And if you buy it for $1.10, you are doing them no favor at all.” Warren Buffett

"It is generally the case that most managements, and indeed whole industries, engage in pro-cyclical behaviour. It is greatly dispiriting to see companies repeatedly buying back their shares as the cycle peaks, only to raise fresh capital at the trough. Shareholders invariably lose out in the process.” Marathon Asset Management

"If you look at the history of share repurchases, you know, it falls off like crazy when stocks are cheap and it tends to goes up dramatically when stocks get fully priced." Warren Buffett

“It seems to me we always used to hate companies that would buy other companies at the top of the market, how’s it any different from buying your own shares at the top of the market.” Russell Clark

"If you’re repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders, just as if you issue shares beneath that figure, you are harming your shareholders." Warren Buffett

"Boards that authorise share-repurchase initiatives at market prices below what the businesses are intrinsically worth per share (without foregoing investment in even more compelling growth opportunities and with due regard for the financial security of the remaining shareholders) are clearly putting the shareholder's interest high on the priority list." Frank Martin

"I urge you, if you’re trying to decide on the wisdom of repurchases, or of share issuances, that you don’t think in terms of book value. You don’t think in terms of specific P/Es. You don’t think in terms of any little model. But you think in terms of what would you really, A, pick businesses you can understand and, then, think what you really would pay to be in those businesses. And that’s what counts over time, is whether the repurchases are made at a discount from that figure." Warren Buffett

“Do they [management] have an intelligent read on intrinsic value and will they consistently buy back shares at attractive discounts to that intrinsic value? That’s another key way to determine whether they are thinking like owners.” Peter Keefe

“If a company buys in stock at X instead of 2X our ownership goes up dramatically more. We don’t like companies buying in their stock just because they are doing it, we like them buying the stock below what we think it’s worth. At that point we’re making money without laying out a dollar of our own money.” Warren Buffett

“When i was in the leveraged buyout (LBO) business, when we explained to prospective management teams, we told them there were three ways to increase value in their equity stakes: i) increase EBITDA, ii) pay down debt, and iii) get the market to apply a higher multiple of the company’s EBITDA than paid initially in the LBO transaction. With public companies, the above three value-creating methodologies still apply, with the addition of an important fourth: Through active capital management, repurchase shares at less than their intrinsic value.” Ted Weschler

“Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.) Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.” Warren Buffett