WEBVTT - Wellington’s Kilbride & Fisher on Dividend Growth 0:00:15.320 --> 0:00:18.720 Welcome to Inside Active podcast about active managers that goes 0:00:18.760 --> 0:00:23.320 beyond sound bites and headlines and looks deeper into their processes, challenges, 0:00:23.360 --> 0:00:26.880 and philosophies and security selection. I'm David Cohne, i lead 0:00:26.960 --> 0:00:30.360 mutual fund and active research at Bloomberg Intelligence. Today my 0:00:30.520 --> 0:00:33.440 co host is Michael casper Us, small cap and sector 0:00:33.440 --> 0:00:36.800 strategist at Bloomberg Intelligence. Mike, thank you for joining me today. 0:00:37.080 --> 0:00:40.839 Thanks David, So, I want to ask you about equity valuations. 0:00:41.640 --> 0:00:44.600 What is the relative appeal of stocks to bonds right now? 0:00:46.080 --> 0:00:48.400 Well, if you look at it on an earnings our 0:00:48.760 --> 0:00:52.479 equity risk premium basis, the equity risk premium for stocks 0:00:52.560 --> 0:00:55.280 is currently negative. That's the first time since the early 0:00:55.320 --> 0:00:59.800 two thousands where that situation has existed. What this means 0:00:59.800 --> 0:01:01.840 for forward returns for the S and P five hundred, 0:01:01.880 --> 0:01:05.319 By the way, it is very mixed. Historically, There's been 0:01:05.360 --> 0:01:08.000 two major stretches where the equity risk premium has been 0:01:08.000 --> 0:01:11.479 negative October nineteen sixty eight through October nineteen seventy three. 0:01:11.720 --> 0:01:15.000 In that period, stocks gained about one point one percent annually. 0:01:15.520 --> 0:01:19.200 The second period, however, from September nineteen eighty through June 0:01:19.200 --> 0:01:21.959 two thousand and two, there was an annualized about ten 0:01:22.040 --> 0:01:25.280 percent return for that period. So it's a very mixed 0:01:25.319 --> 0:01:30.040 situation for stocks. If you quintile or quartile sorry, the 0:01:30.160 --> 0:01:32.600 equity risk premium. Right now, we're in the second quartel, 0:01:32.680 --> 0:01:36.240 so the second lowest quartile of equity risk premium experiences 0:01:36.319 --> 0:01:39.680 going back to the sixties. That means low single digit 0:01:39.720 --> 0:01:42.160 returns for the S and P five hundred, So not bad, 0:01:42.200 --> 0:01:45.160 but below average is how I would categorize it. By 0:01:45.200 --> 0:01:48.600 the way, if you do remove the MiG seven from 0:01:48.760 --> 0:01:52.360 the equity risk premium, you still get an overvalued situation 0:01:52.440 --> 0:01:54.720 for the S and P five hundred, and if you 0:01:54.960 --> 0:01:57.680 are to go down cap, So if you start looking 0:01:57.720 --> 0:02:00.240 at the S and P six hundred, the small cap 0:02:00.280 --> 0:02:03.520 index for the S and P, the equity risk premium 0:02:03.600 --> 0:02:08.280 there is also similarly expensive to bond. So anyway slice 0:02:08.280 --> 0:02:11.720 it right now stocks are looking a bit expensive to bonds. 0:02:12.120 --> 0:02:14.600 Okay, great, I think we can hear from our guests today. 0:02:15.080 --> 0:02:19.080 I'd like to welcome Wellington's Don Kilbright and Peter Fisher 0:02:19.080 --> 0:02:23.040 to Inside Active. Don and Peter are subadvisors to funds 0:02:23.120 --> 0:02:26.720 like the Vanguard Dividend Growth Fund ticker vg ig X 0:02:26.760 --> 0:02:30.160 and the Vanguard International Dividend Growth Fund ticker v I 0:02:30.240 --> 0:02:33.760 d g X, among others. Don Peter, thanks for joining us, 0:02:33.880 --> 0:02:34.720 Thanks for having us. 0:02:34.880 --> 0:02:35.200 Thank you. 0:02:36.040 --> 0:02:38.919 So before we dive into dividends, which is what we're 0:02:38.919 --> 0:02:40.880 going to be talking about today, i'd love to just 0:02:40.919 --> 0:02:43.359 get your thoughts, you know, on the question I posed 0:02:43.400 --> 0:02:45.760 to Mike about just the appeal of stocks right now 0:02:45.760 --> 0:02:46.760 compared to bonds. 0:02:47.400 --> 0:02:49.639 Maybe I'll start and Don can jump in as well. 0:02:49.680 --> 0:02:52.799 I think valuations, you know, look relatively expensive. I think 0:02:52.840 --> 0:02:55.000 what the data that Mike gave, you know, reflects that. 0:02:55.680 --> 0:02:57.360 One of the things is when we think about forward 0:02:57.440 --> 0:03:00.280 returns given high valuations, it's tempting to say, but we're 0:03:00.280 --> 0:03:02.160 going to have a low single digit return, which I 0:03:02.200 --> 0:03:04.280 think is what you would apply from your data. 0:03:03.960 --> 0:03:05.600 But it never actually works that way. You know. 0:03:05.720 --> 0:03:08.520 Usually it's the market's either up or in some cases, 0:03:08.639 --> 0:03:10.480 or the market's expensive. It's either it can be down 0:03:10.560 --> 0:03:12.600 quite a lot. So there's a lot of dispersion in 0:03:12.639 --> 0:03:14.480 the returns that you can get. And it's periods like 0:03:14.480 --> 0:03:16.560 this when valuations are highwood you can get really negative 0:03:16.600 --> 0:03:19.839 market outcomes. The period you name, the late sixties, early 0:03:19.880 --> 0:03:22.800 seventies was a really tough time, you know for markets 0:03:22.800 --> 0:03:25.040 going into the to the lows in the early seventies. 0:03:25.040 --> 0:03:26.919 So we just have to be aware that that's a 0:03:27.320 --> 0:03:29.280 you know, an outcome that is within the range of 0:03:29.560 --> 0:03:31.320 the probability distribution. 0:03:32.560 --> 0:03:35.560 Great, that's a good point. And so you know, one 0:03:35.640 --> 0:03:37.120 question I want to pose at the beginning before we 0:03:37.200 --> 0:03:40.240 kind of dive into the strategy is with Don retiring, 0:03:40.920 --> 0:03:43.200 how do you currently work together there? You know, is 0:03:43.200 --> 0:03:45.840 that do you meet regularly to discuss the portfolios? 0:03:47.360 --> 0:03:50.040 We do, so we meet as a team and Don 0:03:50.120 --> 0:03:52.200 is part of all those conversations. The thing that's changed 0:03:52.240 --> 0:03:54.600 in the last years I became the lead manager for 0:03:54.760 --> 0:03:57.520 the Dinner Growth Fund, but Don is very much still 0:03:57.560 --> 0:03:59.880 a part of the conversation as part of the four 0:04:00.120 --> 0:04:02.040 to get together and talk about the portfolio. So he 0:04:02.080 --> 0:04:04.720 will be sorely missed when he leaves at the end 0:04:04.720 --> 0:04:07.440 of the year by me, especially just we've been working 0:04:07.440 --> 0:04:10.320 together for a long time and Don's great friend and mentor. 0:04:10.920 --> 0:04:13.160 But the team is set up so that Don is 0:04:13.200 --> 0:04:14.560 just one of those voices in the room and so 0:04:14.560 --> 0:04:16.400 hopefully we'll. 0:04:15.720 --> 0:04:18.480 Be fine with that and when he goes, it's great well, 0:04:18.520 --> 0:04:21.520 let's actually talk about the dividend funds. What is the 0:04:21.560 --> 0:04:23.880 process of finding companies? You know, what is a day 0:04:24.000 --> 0:04:24.480 like for you? 0:04:25.920 --> 0:04:28.159 Yeah, so the different growth approach for us, you know, 0:04:28.200 --> 0:04:30.359 different growth is our north star. We're always looking for 0:04:30.360 --> 0:04:32.279 companies that can grow their dividends, and they're two key 0:04:32.320 --> 0:04:35.320 parts of that. The first is does this business create 0:04:35.400 --> 0:04:37.960 value internally by their own investments to make the business 0:04:37.960 --> 0:04:40.520 more valuable over time. We think about that as the 0:04:40.600 --> 0:04:43.200 value creation engine of the business. And the second piece 0:04:43.279 --> 0:04:46.440 is does that business return capital in a sustainable and 0:04:46.480 --> 0:04:49.400 growing way in the form of a growing dividend to shareholders. 0:04:49.600 --> 0:04:51.400 We're looking for companies to have both of those things. 0:04:51.400 --> 0:04:53.000 So that's always the thing that we're trying to get 0:04:53.000 --> 0:04:55.800 our hands around. The dividend growth is the measure that 0:04:56.000 --> 0:04:59.360 tells us that most accinctly. So when companies can grow 0:04:59.400 --> 0:05:01.360 their dividends as stainably, it says to us that these 0:05:01.360 --> 0:05:04.000 are businesses the compound value. They tend to be a 0:05:04.000 --> 0:05:06.240 bit less risky than the average company in the market, 0:05:07.200 --> 0:05:10.720 and so if we can find those companies, then they 0:05:10.920 --> 0:05:12.840 have a good chance at outperforming the market and doing 0:05:12.839 --> 0:05:14.600 it with lower risk than the broader market, So that's 0:05:14.640 --> 0:05:16.720 kind of what we're after. So the day to day 0:05:16.720 --> 0:05:20.479 for us is really about visiting with companies. We read 0:05:20.480 --> 0:05:22.120 a lot, but we also spend a lot of time 0:05:22.200 --> 0:05:25.400 talking and listening to management teams in our offices and 0:05:25.440 --> 0:05:28.840 going to visit their headquarters as well, and that's a 0:05:28.839 --> 0:05:32.359 big part of it putting together the mosaic, trying to 0:05:32.400 --> 0:05:34.960 understand how is this company going to grow, how's the 0:05:35.920 --> 0:05:38.080 industry structure that they're facing going to change, get better 0:05:38.160 --> 0:05:40.200 or worse, and ultimately what is that going. 0:05:40.080 --> 0:05:41.520 To mean for the dividend growth of the business. 0:05:41.920 --> 0:05:43.920 We think about how fast going to grow the dividend, 0:05:43.920 --> 0:05:46.680 Then we think about how risky is that, how uncertain 0:05:46.760 --> 0:05:48.760 is that outcome? And then we think about what's the 0:05:48.760 --> 0:05:51.080 price opportunity today for that company? And that sort of 0:05:51.160 --> 0:05:52.680 drives what comes into the portfolio. 0:05:52.800 --> 0:05:54.920 Can I if I could add something, I couldn't say 0:05:54.920 --> 0:05:57.600 it any better, but a little bit of history might 0:05:57.640 --> 0:06:00.960 be helpful and call that the given in Growth Fund 0:06:01.080 --> 0:06:04.159 was conceived by Vanguard and the mission at that time 0:06:04.400 --> 0:06:07.000 when I took it over was to produce dividend income 0:06:07.040 --> 0:06:09.520 to the fund shareholder at a rate that would in 0:06:09.640 --> 0:06:12.840 sede inflation. By three, not knowing when inflation was going 0:06:12.880 --> 0:06:15.479 to be. Infleation really has been quite low over that 0:06:15.520 --> 0:06:18.159 period of time, but those were the marching orders, and 0:06:18.200 --> 0:06:21.560 what has happened over time is we've recognized that that 0:06:21.720 --> 0:06:25.320 journey produces an insight on stocks that Peter just walked 0:06:25.360 --> 0:06:28.039 you through. So we started with this notion that this 0:06:28.160 --> 0:06:31.159 was a mission based portfolio that was designed with a 0:06:31.279 --> 0:06:34.480 very specific goal in mind, and it has evolved over 0:06:34.560 --> 0:06:36.640 time and it has opened so many new doors for 0:06:36.720 --> 0:06:39.760 us in terms of compounding. So what Peter just described 0:06:39.800 --> 0:06:42.799 to you wasn't exactly where we started, but that's certainly 0:06:42.839 --> 0:06:43.320 where we are. 0:06:44.240 --> 0:06:47.480 So you mentioned dipend growth being your north star, your 0:06:47.760 --> 0:06:49.680 main metric that you look at. Do you look at yield? 0:06:49.680 --> 0:06:52.200 Do you have a certain yield threshold that company has 0:06:52.279 --> 0:06:55.240 to meet for you to purchase it? And are there 0:06:55.240 --> 0:06:58.760 any other divnend related metrics that you used to isolate stocks. 0:06:59.480 --> 0:07:01.520 The only in criteria that we have is that the 0:07:01.560 --> 0:07:05.039 company pay pay a dividend. We're not really concerned with 0:07:05.080 --> 0:07:07.400 the current yield of the portfolio. That's varied over time, 0:07:07.440 --> 0:07:09.080 and you know it's tending to be in then one 0:07:09.120 --> 0:07:11.360 and a half two percent sort of range, you know, 0:07:11.360 --> 0:07:13.679 looking longer term at the yield, But the yield itself 0:07:13.720 --> 0:07:16.280 of any individual company isn't what we're really focused on. 0:07:16.320 --> 0:07:18.600 What we want to know is that the company is 0:07:18.720 --> 0:07:21.600 really focused on paying the right amount of dividend for 0:07:21.640 --> 0:07:25.000 their business and reinvesting the right amount in their business 0:07:25.000 --> 0:07:25.360 for growth. 0:07:25.480 --> 0:07:25.600 You know. 0:07:25.640 --> 0:07:27.720 The worst thing that a company can do is pay 0:07:27.760 --> 0:07:29.760 too high of a dividend, right because if there's money 0:07:29.800 --> 0:07:32.080 they should be reinvesting to grow the business better. They 0:07:32.120 --> 0:07:34.720 do that then give too much money back to the shareholders. 0:07:34.960 --> 0:07:37.320 On the other side, we don't want companies to be 0:07:37.320 --> 0:07:38.960 over investing in their business. We want them to be 0:07:39.080 --> 0:07:40.960 you know, investing the right amount and giving us the 0:07:41.040 --> 0:07:43.680 access that they have back. So the key thing for 0:07:43.760 --> 0:07:46.080 us is what is the optimal amount for that company 0:07:46.080 --> 0:07:48.200 and are they really thoughtful about coming to that number. 0:07:49.040 --> 0:07:50.680 And then very importantly at the end of it for 0:07:50.760 --> 0:07:53.000 us is can that dividend number grow over time? 0:07:53.160 --> 0:07:55.240 It's the dividend growth that we care about, you know, 0:07:55.280 --> 0:07:56.120 not not the yield. 0:07:56.160 --> 0:07:56.400 Today. 0:07:56.480 --> 0:08:00.200 Yield's great, glad to have that, but that's really you know, 0:08:00.800 --> 0:08:03.080 a sidebar to the main thing, which is the dinner growth. 0:08:04.880 --> 0:08:09.720 And one point to add Remember that yield is evaluation metric, 0:08:10.080 --> 0:08:13.400 only half of which the company can control, So it 0:08:13.400 --> 0:08:15.320 can produce a lot of false positives and a lot 0:08:15.360 --> 0:08:19.480 of false negatives. And to Peter's point, it is notable 0:08:20.240 --> 0:08:23.640 because it's a value metric. But what we are have 0:08:23.760 --> 0:08:27.160 been centrally focused on is at what rate can that 0:08:27.200 --> 0:08:30.480 dividend grow? So they're meaningful things that we look at 0:08:30.480 --> 0:08:33.080 in addition to what Peter said, where things like capability, 0:08:33.080 --> 0:08:36.960 payout ratio, are you responsibly growing this dividend, free cash 0:08:36.960 --> 0:08:37.760 flow growth. 0:08:37.480 --> 0:08:38.000 And so on. 0:08:38.440 --> 0:08:42.000 Yield is useful, but it can't produce false positives and 0:08:42.000 --> 0:08:43.720 false negatives, and we just want to make sure we 0:08:43.720 --> 0:08:44.760 don't anchor to it. 0:08:46.120 --> 0:08:49.120 Yeah, let's dive into that last point a little bit more. 0:08:49.679 --> 0:08:52.400 How do you really isolate companies that can grow their 0:08:52.400 --> 0:08:55.400 dividends significantly? Is there a cash flow model behind it 0:08:55.480 --> 0:08:56.240 or something like that. 0:08:56.679 --> 0:08:59.040 Sure, so we do model out the future that we 0:08:59.080 --> 0:09:02.920 expect for companies. The key thing is does the business 0:09:03.160 --> 0:09:06.600 itself create value? You know, is there something about this 0:09:06.640 --> 0:09:09.720 business that allows them to generate high returns on capital 0:09:10.480 --> 0:09:14.079 and excess of what they need to reinvest for growth? 0:09:14.640 --> 0:09:16.760 And if they can do that make the business more 0:09:16.840 --> 0:09:19.040 valuable every day by reinvesting in their business, and the 0:09:19.040 --> 0:09:22.120 business becomes more valuable, and therefore there's more cash next 0:09:22.200 --> 0:09:23.840 year to pay a higher DUTA. 0:09:23.679 --> 0:09:24.400 Than they do this year. 0:09:24.400 --> 0:09:28.720 So that ability to to you know, reinvest for growth 0:09:29.160 --> 0:09:31.680 is the first and most important thing that we're looking at. 0:09:32.360 --> 0:09:34.600 And then the second thing is it's helpful if the 0:09:34.600 --> 0:09:37.040 payout ratio you know, has the opportunity to grow over 0:09:37.080 --> 0:09:37.560 time as well. 0:09:37.679 --> 0:09:39.120 So we're very open to that. 0:09:39.640 --> 0:09:41.439 You know that they're voda scenario for us as a 0:09:41.480 --> 0:09:44.319 company that has a really high return on capital, great 0:09:44.559 --> 0:09:47.160 you know, moats and barriers to entry and the ability 0:09:47.160 --> 0:09:49.560 to sustain the high return on capital and stuff to 0:09:49.600 --> 0:09:51.959 invest in so they can grow the company at those 0:09:52.040 --> 0:09:54.719 high returns and then they have excess cash to give 0:09:54.760 --> 0:09:56.920 back to us along the way, and maybe there's some 0:09:56.920 --> 0:09:58.960 scope for the payout you know, to go up somewhat. 0:09:58.960 --> 0:10:01.000 That's the perfect scenario for us. 0:10:03.040 --> 0:10:05.400 The thing that I've become sort of moniolically focused on 0:10:05.480 --> 0:10:07.240 over the years, in addition to some of the stuff 0:10:07.240 --> 0:10:10.040 Peter just pointed out, is is there low amplitude in 0:10:10.040 --> 0:10:13.000 your business? That is to say, is your business does 0:10:13.040 --> 0:10:16.200 your business compound at a predictable rate over time, and 0:10:16.240 --> 0:10:19.079 you don't have these moments of despair where your cash 0:10:19.080 --> 0:10:23.160 flow can get compromised. So low amplitude of results, low 0:10:23.200 --> 0:10:26.120 capital intensity, when they tend to go hand in hand, 0:10:26.520 --> 0:10:28.720 are also things that we want to pay a lot 0:10:28.760 --> 0:10:31.960 of attention to. It's all about to Peter's point, it 0:10:32.000 --> 0:10:35.520 really is all about how well are you caring for 0:10:35.559 --> 0:10:39.040 that value creating engine, because if it's not working, nothing 0:10:39.040 --> 0:10:39.760 else works. 0:10:40.960 --> 0:10:42.959 So I wanted to kind of go back a little bit. 0:10:43.320 --> 0:10:46.920 Don you had mentioned yield as a valuation metric, are 0:10:46.920 --> 0:10:51.440 there other valuation metrics both of you consider, you know, 0:10:51.559 --> 0:10:55.360 just in terms of when to enter or not necessarily trade, 0:10:55.360 --> 0:10:58.040 but when you know, just in terms of the company 0:10:58.080 --> 0:10:59.000 over the future. 0:11:00.880 --> 0:11:03.640 We'll look at a range of valuation measures. We'll use 0:11:03.760 --> 0:11:07.280 traditional ones like pe or we prefer price to cash flow, 0:11:07.320 --> 0:11:08.920 or you be a cash flow as a measure just 0:11:08.920 --> 0:11:12.199 to capture the fact that different companies have different capital intensity. 0:11:12.880 --> 0:11:15.640 We'll use more esoteric measures when necessary, and then we 0:11:15.679 --> 0:11:17.840 do look at a discount of cash flow model just 0:11:17.840 --> 0:11:22.360 to have, you know, another gut check on valuation. But 0:11:22.480 --> 0:11:25.040 the first thing that we really we'll key on often 0:11:25.160 --> 0:11:27.640 is just the price of something, And that sounds a 0:11:27.679 --> 0:11:30.080 little bit simplistic, but if you think about it, the 0:11:30.080 --> 0:11:33.760 businesses that we're investing in are tend to be pretty large, 0:11:33.800 --> 0:11:34.760 stable companies. 0:11:35.240 --> 0:11:37.880 So if the price of the stock changes. 0:11:37.600 --> 0:11:40.000 Dramatically in a short period of time, it's very unlikely 0:11:40.080 --> 0:11:41.199 that the value that business. 0:11:40.920 --> 0:11:42.120 Has actually changed that much. 0:11:42.520 --> 0:11:44.360 So just the share change in a stock price can 0:11:44.360 --> 0:11:46.520 be a trigger for us to want to be interested 0:11:46.520 --> 0:11:48.640 in it, and then we'll explore all all those measures. 0:11:48.640 --> 0:11:51.880 But you know, valuation is the last thing that we do. 0:11:52.840 --> 0:11:55.079 What we want to make sure we're doing is creating 0:11:55.440 --> 0:11:58.000 a collection of companies that are going to compound value 0:11:58.040 --> 0:12:01.200 steadily over time and grow their events seadily over time 0:12:01.559 --> 0:12:04.920 and therefore hopefully outperformed slowly over time. When we find 0:12:04.960 --> 0:12:07.880 those businesses, we can have pretty high confidence usually that 0:12:07.880 --> 0:12:10.480 that's a company we want to have in our collection. 0:12:11.520 --> 0:12:13.640 The thing that's a little more uncertained is, okay, well, 0:12:13.640 --> 0:12:15.920 what's it worth? You know, I think it's very hard 0:12:15.960 --> 0:12:19.240 to know within a narrow range what any company is worth. 0:12:20.000 --> 0:12:22.880 Just having looked at valuations over time, as you have, 0:12:23.000 --> 0:12:26.040 you've probably seen the same company trade for wildly different valuations, 0:12:26.440 --> 0:12:29.000 So it's the most uncertain piece of all of it 0:12:29.040 --> 0:12:30.040 for us. So what we want to do is make 0:12:30.040 --> 0:12:32.160 sure we're getting the right companies in there, and then 0:12:32.200 --> 0:12:35.199 we'll use valuation as the last piece to try to say, Okay, 0:12:35.400 --> 0:12:37.840 you know, how do we size this relative to something else? 0:12:38.200 --> 0:12:40.760 And I would put valuation sort of in three buckets. 0:12:40.920 --> 0:12:43.800 I would say, there are times when valuation is your friend, 0:12:44.280 --> 0:12:46.760 there are times in valuation is your enemy. And there's 0:12:46.760 --> 0:12:48.280 a lot of time when you're sort of in the 0:12:48.280 --> 0:12:51.680 middle and you think valuation is sort of neutral relative 0:12:51.720 --> 0:12:53.800 to what I think it could be, and it shouldn't be. 0:12:53.800 --> 0:12:55.400 A primary driver of what we're doing. 0:12:56.120 --> 0:12:58.160 And so we use all those different valuation measures to 0:12:58.160 --> 0:13:00.480 try to bucket things into one of those three capsgories 0:13:00.800 --> 0:13:02.679 and try to as much as we can make valuation 0:13:02.720 --> 0:13:05.080 our friend rather than our enemy. But except sometimes it's 0:13:05.080 --> 0:13:07.200 going to be in the middle where it's not really 0:13:07.360 --> 0:13:08.720 a main driver of the decision. 0:13:10.440 --> 0:13:13.160 Just to amplify what Peter said, the other subtlety in 0:13:13.200 --> 0:13:17.080 all this is that in the fund itself, and Peter 0:13:17.120 --> 0:13:19.200 will correct me if I'm wrong, but let's just say 0:13:19.240 --> 0:13:22.400 on average turnover, something like ten percent give or take 0:13:23.280 --> 0:13:26.200 implies a ten year holding period, which is in fact 0:13:26.320 --> 0:13:28.560 the empirical data would suggest that we do hold things 0:13:28.559 --> 0:13:31.320 for that long and longer. If you're going to own 0:13:31.400 --> 0:13:33.920 something for ten years and you're going to allow time 0:13:34.040 --> 0:13:37.120 to help you compound value, particularly with you've got to 0:13:37.120 --> 0:13:39.439 give it in growth underneath it. There's not a lot 0:13:39.480 --> 0:13:42.760 of information in a two year pe ratio. There's a 0:13:42.800 --> 0:13:45.839 mismatch there. So we would have missed so much if 0:13:45.840 --> 0:13:48.480 we had gotten frightened one way or the other by 0:13:48.559 --> 0:13:51.480 valuation on a lot of the stocks that we've bonne 0:13:51.520 --> 0:13:55.079 through time. So that disconnect is something that I think 0:13:55.120 --> 0:13:57.960 Peter and I both have sort of ingrained in our 0:13:58.000 --> 0:13:58.600 heads now. 0:13:59.320 --> 0:14:01.440 Some of the word stocks that we've ever owned were 0:14:01.440 --> 0:14:04.240 some of the cheapest on traditional valuation measures, and a 0:14:04.240 --> 0:14:06.200 lot of the best stocks we've owned were the most expensive, 0:14:06.800 --> 0:14:09.640 and if we had gotten too fixated on the valuation, 0:14:10.080 --> 0:14:13.040 it would have caused us to sell them. So we've learned, 0:14:13.360 --> 0:14:16.040 as Don said, let's focus on finding the right businesses 0:14:16.640 --> 0:14:19.240 and then valuation becomes the last piece, just to say, okay, 0:14:19.280 --> 0:14:21.560 are we do we think we're comfortable owning it at 0:14:21.600 --> 0:14:25.200 this valuation? There are rare times when evaluation becomes so 0:14:25.320 --> 0:14:28.160 extreme that it becomes more of a driver of decision making. 0:14:28.200 --> 0:14:30.560 But those those moments are pretty rare. 0:14:32.000 --> 0:14:34.800 Remember, just to close the loop on yield, I think Michael, 0:14:34.800 --> 0:14:38.000 you you met, you asked about yield earlier on that 0:14:38.280 --> 0:14:41.280 you know, by and large, high yields tend to be attractive, 0:14:41.440 --> 0:14:43.400 but they can also be a signal. 0:14:43.480 --> 0:14:45.000 So high yield were you to be. 0:14:45.080 --> 0:14:47.360 Sort of responsive to that might lead you to a 0:14:47.400 --> 0:14:49.800 place where the market's telling you we don't think this 0:14:49.880 --> 0:14:53.880 dividends sustainable, and that's why it's valued this highly. So again, 0:14:53.960 --> 0:14:57.400 valuation is is, to Peter's point, is something that we 0:14:57.440 --> 0:14:59.960 want to deal with at the end of the process, 0:15:00.120 --> 0:15:01.240 not so much at the beginning. 0:15:01.960 --> 0:15:05.320 Definitely makes sense. And do you consider other uses of capital? 0:15:05.360 --> 0:15:07.880 I know some dividend investors get frustrated with the company 0:15:07.920 --> 0:15:10.240 that pours money back into the business and not returning 0:15:10.240 --> 0:15:13.120 it to shareholders. And do you do you care about 0:15:13.120 --> 0:15:16.280 buybacks and things like that, other uses of capital to 0:15:16.480 --> 0:15:17.800 return money to shareholders. 0:15:18.240 --> 0:15:18.480 Yeah. 0:15:18.520 --> 0:15:21.040 The first thing is for the business that you're looking at, 0:15:21.080 --> 0:15:23.240 what is the right amount for them to invest? That's 0:15:23.280 --> 0:15:25.480 the first question. If you're in a business with a 0:15:25.480 --> 0:15:27.920 lot of growth opportunities. By all means you should be 0:15:28.000 --> 0:15:30.360 investing all your money. We don't have any problem with that. 0:15:30.600 --> 0:15:31.960 We may not invest in your company if you're not 0:15:32.000 --> 0:15:33.720 paying a dividend because you're investing in all but that 0:15:33.760 --> 0:15:34.760 may be the right answer for you. 0:15:35.200 --> 0:15:38.400 That's perfectly fine. So the first thing is are they being. 0:15:38.240 --> 0:15:40.600 Thoughtful about how they're out they're figuring out what they 0:15:40.640 --> 0:15:43.600 should be investing in, and are they doing that. That's 0:15:43.640 --> 0:15:46.080 the first thing. In terms of In terms of shary purchase, 0:15:46.560 --> 0:15:49.520 shary purchases are fine. We have no problem with the 0:15:49.520 --> 0:15:52.440 shary purchase. But it's different than a dividend, and we 0:15:52.520 --> 0:15:54.840 have to recognize that. You know, a dividend is a 0:15:54.840 --> 0:15:58.160 commitment that you make to your shareholders. Typically in the US, 0:15:58.280 --> 0:16:00.280 if you if you set a dividend, you never want 0:16:00.280 --> 0:16:02.360 to cut that dividend. So if you think about what 0:16:02.440 --> 0:16:04.760 that statement is to a management team, that's quite a 0:16:04.760 --> 0:16:07.800 powerful statement. They're saying, we have enough confidence in the 0:16:07.800 --> 0:16:11.040 future cashless streams of this business that we're really confident 0:16:11.040 --> 0:16:12.880 we're never going to have to cut it. So there 0:16:12.880 --> 0:16:15.120 has to be some confidence in the future in the 0:16:15.120 --> 0:16:17.080 future earnings power of the company behind that, or they 0:16:17.080 --> 0:16:19.520 wouldn't do it. A shary purchase. On the other hand, 0:16:19.520 --> 0:16:21.080 you can flex those up and down as you want, 0:16:21.080 --> 0:16:24.000 so it's a much weaker statement about your expectations for 0:16:24.040 --> 0:16:25.880 the future. So there's nothing wrong with it. If you 0:16:25.920 --> 0:16:28.440 have excess cash, by all means do a shary purchase. 0:16:28.480 --> 0:16:32.520 But the dividend is a more powerful signal signal of 0:16:32.560 --> 0:16:36.640 what's happening in the future. Because and this is to 0:16:36.680 --> 0:16:40.640 get to something Don mentioned a minute ago, because a 0:16:40.640 --> 0:16:43.960 dividend is a commitment. It says something about your business. 0:16:44.360 --> 0:16:47.760 It says that there's a lower amplitude probably to your 0:16:47.800 --> 0:16:50.720 future expectations, is a less risk in this company, and 0:16:50.800 --> 0:16:54.840 so therefore we feel comfortable making this commitment if you pay. 0:16:54.960 --> 0:16:57.080 If you do a shary purchase, you're not making that statement. 0:16:57.480 --> 0:17:00.360 You know, it may be totally appropriate. Have a more 0:17:00.360 --> 0:17:02.280 cyclical business, and you have to do it that way, 0:17:02.480 --> 0:17:05.280 perfectly fine, but we just have to recognize it's a 0:17:05.320 --> 0:17:06.160 slightly different thing. 0:17:07.720 --> 0:17:11.240 I've always thought about cheery purchase as something that amplifies 0:17:11.320 --> 0:17:12.119 the good things. 0:17:12.560 --> 0:17:13.960 So there's a pecking order, right. 0:17:14.320 --> 0:17:16.439 We want you to invest in the machine, invest in 0:17:16.440 --> 0:17:19.080 the business, great value. We want you to share that 0:17:19.160 --> 0:17:21.960 with us through that commitment. To Peter's point of a 0:17:22.000 --> 0:17:24.399 dividend and let's grow it over time, that's even better. 0:17:24.720 --> 0:17:26.440 And if you want to buy some stock back at 0:17:26.440 --> 0:17:29.120 the end of all that, that amplifies all the per 0:17:29.160 --> 0:17:30.000 share metrics. 0:17:31.640 --> 0:17:33.119 I personally, I think Peter agrees. 0:17:33.320 --> 0:17:35.240 I would say that the data would suggest that cheery 0:17:35.280 --> 0:17:38.760 purchases over time are not effective, They're not well done. 0:17:38.800 --> 0:17:41.720 The data supports that, I think. But if you're willing, 0:17:42.000 --> 0:17:42.960 if you want to buy some. 0:17:42.920 --> 0:17:45.719 Shares back after we've done those first two things, to 0:17:45.880 --> 0:17:48.600 Peter's point, go for it, because it's just going to 0:17:48.640 --> 0:17:50.120 amplify all the per share stuff. 0:17:51.280 --> 0:17:54.240 To Don's point, think about when companies buymac shares, it's 0:17:54.240 --> 0:17:56.879 when they have a lot of extra money lying around. Usually, 0:17:56.880 --> 0:17:59.360 if you have extra money laying around, your business has 0:17:59.440 --> 0:18:02.040 done well RECs and your stock prices up. So the 0:18:02.119 --> 0:18:04.040 reality is you're going to tend to buy more shares 0:18:04.080 --> 0:18:06.840 back when your stock is more expensive. You know, it's 0:18:06.920 --> 0:18:09.199 rare that a company is able to stockpile cash and 0:18:09.320 --> 0:18:10.480 use it when their stock is cheap. 0:18:10.600 --> 0:18:12.600 Usually they're buying stock at higher prices. 0:18:12.640 --> 0:18:14.719 So that's the reason why there's some slippage in that 0:18:15.280 --> 0:18:18.320 in that number, it just makes you share your purchase 0:18:18.400 --> 0:18:19.600