The Greatest Case Study on Capital Allocation
Dr. Singleton and Teledyne - something you may not have heard of
Dr. Singleton and Teledyne - A phenomenal case study on Capital Allocation and Total Shareholder Returns
Just started reading The Outsiders again - A book on 8 outsider / unconventional CEOs with impeccable track record of ensuring capital allocation was done the right way to maximise shareholder returns.
Midway through the book is a chapter on Teledyne and Henry Singleton - one of the most successful capital allocators, a name that you will often not find being talked about a lot in business case studies.
Well, to start off, there are always bubbles and 'hot crazes' of particular stocks and industries at particular points of time. When Singleton took over, conglomerate stocks were in craze.
Now, Teledyne had a lot of businesses - fighter jets, tanks, submarines mostly around applications in defence.
Singleton realised that there were particular businesses where they had a leadership position and possessed the right to win whereas in other areas, they were way behind the curve.
To start off, he sold the fighter jets division, a decision that would also take away the 'perk' of flying F-16 jets. While on one side he initiated a series of tight cost control measures, on the other hand he kept selling off all bad businesses.
At one point, investors started fearing that the company might go into liquidation.
What did he do with this new found cash?
A series of tax efficient buybacks, rarely paid dividends and also used the cash to do interesting treasury decisions basis the interest rate movements.
Instead of trying to optimise for quarterly earnings and try answering wall street on the indicators they liked to see, he had an uncanny ability of focusing on maximising TSR (Total Shareholder Returns - a function of dividend returned along with share price growth and buybacks, if any) and ensuring the Free Cash Flow growth was optimised.
So what was the bottom line of all this?
An investor who put money into Teledyne stock in 1966 achieved an annual return of 17.9 percent over 25 years, or 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.
Teledyne’s investors were rewarded with a triple whammy of increasing earnings with a shrinking capital structure along with an expanding P/E ratio.
As the single largest investor in Teledyne, Dr. Singleton chose to make money alongside his fellow investors not from them.
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