This is a continuation of my 10 part series on the core concepts I am focusing on in this difficult market environment. (Part I, II, III)
Any long-time reader of this site will know that I place a great emphasis on the quality and competency of the management of companies I invest in. The reason for this is fairly simple and straightforward: as a shareholder I invest capital into the business and I expect management to properly manage that resource. I invest with the expectation of a return and generally want management with interest similar to those of my own.
This environment will put managers and decision makers of any business to the test and hard decisions will need to be made. Those with strategic foresight will be stars that will shine and the ineffective wannabes who focus on personal achievement and profits will crash and burn.
I never have the expectation that management will have 100% of my interests aligned with their own, but I want a majority. In this environment management might not be able to put all my interests first as a shareholder, but I want to see initiative taken to protect the business through this difficult period. I want management that focuses on not just the short-term, but the long-term as well. I’m looking for managers who have the capability to improve the longevity of their business model, products & services and the competitive stance in their respective industry.
My expectations of dividend increases that outpace twice the rate inflation might need to be trimmed towards a more conservative perspective as will share buybacks and other initiatives. I need to realize as a shareholder that the business may need that additional cashflow for operating needs that better place the business in a position to grow in the future. What I expect is that management will focus on cost reductions, investments in meaningful assets that contribute a significant long-term ROI and who can properly seek strategic solutions that I consider imperative to the long-term health of the company.
Bottom Line: At the end of this cycle I want businesses that are standing in an equal or better financial, strategic and operating position than when they entered it. A business pays a CEO a lot of money to steer the ship in & out of port on time and without incident. These are not the times for young executives to make bold risky moves in order to further their career or for managers to take their finger off the pulse of the business. An investor has to ask only one question when assessing management of the company: Do I Trust Them?
Suggested Stocks I Own: Johnson & Johnson (JNJ), Wells Fargo (WFC), Bank of Nova Scotia (BNS) & Atco (ACO.X).
Side Note: I think it’s important for readers to put into context the value we’re seeing among conservative, well managed companies with a global presence. In the case of Atco (ACO.X) it is currently trading around July 2006 levels in this market environment. Since then it has grown its dividend 14.6%, EPS has grown by 28.2% and the book value per share has grown 9.7%.