Speaker 1: Welcome to Inside Active podcast about active managers that goes
Speaker 1: beyond sound bites and headlines and looks deeper into their processes, challenges,
Speaker 1: and philosophies and security selection. I'm David Cohne, i lead
Speaker 1: mutual fund and active research at Bloomberg Intelligence. Today my
Speaker 1: co host is Michael casper Us, small cap and sector
Speaker 1: strategist at Bloomberg Intelligence. Mike, thank you for joining me today.
Speaker 1: Thanks David, So, I want to ask you about equity valuations.
Speaker 1: What is the relative appeal of stocks to bonds right now?
Speaker 2: Well, if you look at it on an earnings our
Speaker 2: equity risk premium basis, the equity risk premium for stocks
Speaker 2: is currently negative. That's the first time since the early
Speaker 2: two thousands where that situation has existed. What this means
Speaker 2: for forward returns for the S and P five hundred,
Speaker 2: By the way, it is very mixed. Historically, There's been
Speaker 2: two major stretches where the equity risk premium has been
Speaker 2: negative October nineteen sixty eight through October nineteen seventy three.
Speaker 2: In that period, stocks gained about one point one percent annually.
Speaker 2: The second period, however, from September nineteen eighty through June
Speaker 2: two thousand and two, there was an annualized about ten
Speaker 2: percent return for that period. So it's a very mixed
Speaker 2: situation for stocks. If you quintile or quartile sorry, the
Speaker 2: equity risk premium. Right now, we're in the second quartel,
Speaker 2: so the second lowest quartile of equity risk premium experiences
Speaker 2: going back to the sixties. That means low single digit
Speaker 2: returns for the S and P five hundred, So not bad,
Speaker 2: but below average is how I would categorize it. By
Speaker 2: the way, if you do remove the MiG seven from
Speaker 2: the equity risk premium, you still get an overvalued situation
Speaker 2: for the S and P five hundred, and if you
Speaker 2: are to go down cap, So if you start looking
Speaker 2: at the S and P six hundred, the small cap
Speaker 2: index for the S and P, the equity risk premium
Speaker 2: there is also similarly expensive to bond. So anyway slice
Speaker 2: it right now stocks are looking a bit expensive to bonds.
Speaker 1: Okay, great, I think we can hear from our guests today.
Speaker 1: I'd like to welcome Wellington's Don Kilbright and Peter Fisher
Speaker 1: to Inside Active. Don and Peter are subadvisors to funds
Speaker 1: like the Vanguard Dividend Growth Fund ticker vg ig X
Speaker 1: and the Vanguard International Dividend Growth Fund ticker v I
Speaker 1: d g X, among others. Don Peter, thanks for joining us,
Speaker 1: Thanks for having us.
Speaker 3: Thank you.
Speaker 1: So before we dive into dividends, which is what we're
Speaker 1: going to be talking about today, i'd love to just
Speaker 1: get your thoughts, you know, on the question I posed
Speaker 1: to Mike about just the appeal of stocks right now
Speaker 1: compared to bonds.
Speaker 4: Maybe I'll start and Don can jump in as well.
Speaker 4: I think valuations, you know, look relatively expensive. I think
Speaker 4: what the data that Mike gave, you know, reflects that.
Speaker 4: One of the things is when we think about forward
Speaker 4: returns given high valuations, it's tempting to say, but we're
Speaker 4: going to have a low single digit return, which I
Speaker 4: think is what you would apply from your data.
Speaker 5: But it never actually works that way. You know.
Speaker 4: Usually it's the market's either up or in some cases,
Speaker 4: or the market's expensive. It's either it can be down
Speaker 4: quite a lot. So there's a lot of dispersion in
Speaker 4: the returns that you can get. And it's periods like
Speaker 4: this when valuations are highwood you can get really negative
Speaker 4: market outcomes. The period you name, the late sixties, early
Speaker 4: seventies was a really tough time, you know for markets
Speaker 4: going into the to the lows in the early seventies.
Speaker 4: So we just have to be aware that that's a
Speaker 4: you know, an outcome that is within the range of
Speaker 4: the probability distribution.
Speaker 1: Great, that's a good point. And so you know, one
Speaker 1: question I want to pose at the beginning before we
Speaker 1: kind of dive into the strategy is with Don retiring,
Speaker 1: how do you currently work together there? You know, is
Speaker 1: that do you meet regularly to discuss the portfolios?
Speaker 4: We do, so we meet as a team and Don
Speaker 4: is part of all those conversations. The thing that's changed
Speaker 4: in the last years I became the lead manager for
Speaker 4: the Dinner Growth Fund, but Don is very much still
Speaker 4: a part of the conversation as part of the four
Speaker 4: to get together and talk about the portfolio. So he
Speaker 4: will be sorely missed when he leaves at the end
Speaker 4: of the year by me, especially just we've been working
Speaker 4: together for a long time and Don's great friend and mentor.
Speaker 4: But the team is set up so that Don is
Speaker 4: just one of those voices in the room and so
Speaker 4: hopefully we'll.
Speaker 1: Be fine with that and when he goes, it's great well,
Speaker 1: let's actually talk about the dividend funds. What is the
Speaker 1: process of finding companies? You know, what is a day
Speaker 1: like for you?
Speaker 4: Yeah, so the different growth approach for us, you know,
Speaker 4: different growth is our north star. We're always looking for
Speaker 4: companies that can grow their dividends, and they're two key
Speaker 4: parts of that. The first is does this business create
Speaker 4: value internally by their own investments to make the business
Speaker 4: more valuable over time. We think about that as the
Speaker 4: value creation engine of the business. And the second piece
Speaker 4: is does that business return capital in a sustainable and
Speaker 4: growing way in the form of a growing dividend to shareholders.
Speaker 4: We're looking for companies to have both of those things.
Speaker 4: So that's always the thing that we're trying to get
Speaker 4: our hands around. The dividend growth is the measure that
Speaker 4: tells us that most accinctly. So when companies can grow
Speaker 4: their dividends as stainably, it says to us that these
Speaker 4: are businesses the compound value. They tend to be a
Speaker 4: bit less risky than the average company in the market,
Speaker 4: and so if we can find those companies, then they
Speaker 4: have a good chance at outperforming the market and doing
Speaker 4: it with lower risk than the broader market, So that's
Speaker 4: kind of what we're after. So the day to day
Speaker 4: for us is really about visiting with companies. We read
Speaker 4: a lot, but we also spend a lot of time
Speaker 4: talking and listening to management teams in our offices and
Speaker 4: going to visit their headquarters as well, and that's a
Speaker 4: big part of it putting together the mosaic, trying to
Speaker 4: understand how is this company going to grow, how's the
Speaker 4: industry structure that they're facing going to change, get better
Speaker 4: or worse, and ultimately what is that going.
Speaker 5: To mean for the dividend growth of the business.
Speaker 4: We think about how fast going to grow the dividend,
Speaker 4: Then we think about how risky is that, how uncertain
Speaker 4: is that outcome? And then we think about what's the
Speaker 4: price opportunity today for that company? And that sort of
Speaker 4: drives what comes into the portfolio.
Speaker 6: Can I if I could add something, I couldn't say
Speaker 6: it any better, but a little bit of history might
Speaker 6: be helpful and call that the given in Growth Fund
Speaker 6: was conceived by Vanguard and the mission at that time
Speaker 6: when I took it over was to produce dividend income
Speaker 6: to the fund shareholder at a rate that would in
Speaker 6: sede inflation. By three, not knowing when inflation was going
Speaker 6: to be. Infleation really has been quite low over that
Speaker 6: period of time, but those were the marching orders, and
Speaker 6: what has happened over time is we've recognized that that
Speaker 6: journey produces an insight on stocks that Peter just walked
Speaker 6: you through. So we started with this notion that this
Speaker 6: was a mission based portfolio that was designed with a
Speaker 6: very specific goal in mind, and it has evolved over
Speaker 6: time and it has opened so many new doors for
Speaker 6: us in terms of compounding. So what Peter just described
Speaker 6: to you wasn't exactly where we started, but that's certainly
Speaker 6: where we are.
Speaker 2: So you mentioned dipend growth being your north star, your
Speaker 2: main metric that you look at. Do you look at yield?
Speaker 2: Do you have a certain yield threshold that company has
Speaker 2: to meet for you to purchase it? And are there
Speaker 2: any other divnend related metrics that you used to isolate stocks.
Speaker 4: The only in criteria that we have is that the
Speaker 4: company pay pay a dividend. We're not really concerned with
Speaker 4: the current yield of the portfolio. That's varied over time,
Speaker 4: and you know it's tending to be in then one
Speaker 4: and a half two percent sort of range, you know,
Speaker 4: looking longer term at the yield, But the yield itself
Speaker 4: of any individual company isn't what we're really focused on.
Speaker 4: What we want to know is that the company is
Speaker 4: really focused on paying the right amount of dividend for
Speaker 4: their business and reinvesting the right amount in their business
Speaker 4: for growth.
Speaker 1: You know.
Speaker 4: The worst thing that a company can do is pay
Speaker 4: too high of a dividend, right because if there's money
Speaker 4: they should be reinvesting to grow the business better. They
Speaker 4: do that then give too much money back to the shareholders.
Speaker 4: On the other side, we don't want companies to be
Speaker 4: over investing in their business. We want them to be
Speaker 4: you know, investing the right amount and giving us the
Speaker 4: access that they have back. So the key thing for
Speaker 4: us is what is the optimal amount for that company
Speaker 4: and are they really thoughtful about coming to that number.
Speaker 4: And then very importantly at the end of it for
Speaker 4: us is can that dividend number grow over time?
Speaker 5: It's the dividend growth that we care about, you know,
Speaker 5: not not the yield.
Speaker 3: Today.
Speaker 4: Yield's great, glad to have that, but that's really you know,
Speaker 4: a sidebar to the main thing, which is the dinner growth.
Speaker 6: And one point to add Remember that yield is evaluation metric,
Speaker 6: only half of which the company can control, So it
Speaker 6: can produce a lot of false positives and a lot
Speaker 6: of false negatives. And to Peter's point, it is notable
Speaker 6: because it's a value metric. But what we are have
Speaker 6: been centrally focused on is at what rate can that
Speaker 6: dividend grow? So they're meaningful things that we look at
Speaker 6: in addition to what Peter said, where things like capability,
Speaker 6: payout ratio, are you responsibly growing this dividend, free cash
Speaker 6: flow growth.
Speaker 3: And so on.
Speaker 6: Yield is useful, but it can't produce false positives and
Speaker 6: false negatives, and we just want to make sure we
Speaker 6: don't anchor to it.
Speaker 2: Yeah, let's dive into that last point a little bit more.
Speaker 2: How do you really isolate companies that can grow their
Speaker 2: dividends significantly? Is there a cash flow model behind it
Speaker 2: or something like that.
Speaker 4: Sure, so we do model out the future that we
Speaker 4: expect for companies. The key thing is does the business
Speaker 4: itself create value? You know, is there something about this
Speaker 4: business that allows them to generate high returns on capital
Speaker 4: and excess of what they need to reinvest for growth?
Speaker 4: And if they can do that make the business more
Speaker 4: valuable every day by reinvesting in their business, and the
Speaker 4: business becomes more valuable, and therefore there's more cash next
Speaker 4: year to pay a higher DUTA.
Speaker 5: Than they do this year.
Speaker 4: So that ability to to you know, reinvest for growth
Speaker 4: is the first and most important thing that we're looking at.
Speaker 4: And then the second thing is it's helpful if the
Speaker 4: payout ratio you know, has the opportunity to grow over
Speaker 4: time as well.
Speaker 5: So we're very open to that.
Speaker 4: You know that they're voda scenario for us as a
Speaker 4: company that has a really high return on capital, great
Speaker 4: you know, moats and barriers to entry and the ability
Speaker 4: to sustain the high return on capital and stuff to
Speaker 4: invest in so they can grow the company at those
Speaker 4: high returns and then they have excess cash to give
Speaker 4: back to us along the way, and maybe there's some
Speaker 4: scope for the payout you know, to go up somewhat.
Speaker 4: That's the perfect scenario for us.
Speaker 6: The thing that I've become sort of moniolically focused on
Speaker 6: over the years, in addition to some of the stuff
Speaker 6: Peter just pointed out, is is there low amplitude in
Speaker 6: your business? That is to say, is your business does
Speaker 6: your business compound at a predictable rate over time, and
Speaker 6: you don't have these moments of despair where your cash
Speaker 6: flow can get compromised. So low amplitude of results, low
Speaker 6: capital intensity, when they tend to go hand in hand,
Speaker 6: are also things that we want to pay a lot
Speaker 6: of attention to. It's all about to Peter's point, it
Speaker 6: really is all about how well are you caring for
Speaker 6: that value creating engine, because if it's not working, nothing
Speaker 6: else works.
Speaker 1: So I wanted to kind of go back a little bit.
Speaker 1: Don you had mentioned yield as a valuation metric, are
Speaker 1: there other valuation metrics both of you consider, you know,
Speaker 1: just in terms of when to enter or not necessarily trade,
Speaker 1: but when you know, just in terms of the company
Speaker 1: over the future.
Speaker 4: We'll look at a range of valuation measures. We'll use
Speaker 4: traditional ones like pe or we prefer price to cash flow,
Speaker 4: or you be a cash flow as a measure just
Speaker 4: to capture the fact that different companies have different capital intensity.
Speaker 4: We'll use more esoteric measures when necessary, and then we
Speaker 4: do look at a discount of cash flow model just
Speaker 4: to have, you know, another gut check on valuation. But
Speaker 4: the first thing that we really we'll key on often
Speaker 4: is just the price of something, And that sounds a
Speaker 4: little bit simplistic, but if you think about it, the
Speaker 4: businesses that we're investing in are tend to be pretty large,
Speaker 4: stable companies.
Speaker 5: So if the price of the stock changes.
Speaker 4: Dramatically in a short period of time, it's very unlikely
Speaker 4: that the value that business.
Speaker 5: Has actually changed that much.
Speaker 4: So just the share change in a stock price can
Speaker 4: be a trigger for us to want to be interested
Speaker 4: in it, and then we'll explore all all those measures.
Speaker 4: But you know, valuation is the last thing that we do.
Speaker 4: What we want to make sure we're doing is creating
Speaker 4: a collection of companies that are going to compound value
Speaker 4: steadily over time and grow their events seadily over time
Speaker 4: and therefore hopefully outperformed slowly over time. When we find
Speaker 4: those businesses, we can have pretty high confidence usually that
Speaker 4: that's a company we want to have in our collection.
Speaker 4: The thing that's a little more uncertained is, okay, well,
Speaker 4: what's it worth? You know, I think it's very hard
Speaker 4: to know within a narrow range what any company is worth.
Speaker 4: Just having looked at valuations over time, as you have,
Speaker 4: you've probably seen the same company trade for wildly different valuations,
Speaker 4: So it's the most uncertain piece of all of it
Speaker 4: for us. So what we want to do is make
Speaker 4: sure we're getting the right companies in there, and then
Speaker 4: we'll use valuation as the last piece to try to say, Okay,
Speaker 4: you know, how do we size this relative to something else?
Speaker 4: And I would put valuation sort of in three buckets.
Speaker 4: I would say, there are times when valuation is your friend,
Speaker 4: there are times in valuation is your enemy. And there's
Speaker 4: a lot of time when you're sort of in the
Speaker 4: middle and you think valuation is sort of neutral relative
Speaker 4: to what I think it could be, and it shouldn't be.
Speaker 5: A primary driver of what we're doing.
Speaker 4: And so we use all those different valuation measures to
Speaker 4: try to bucket things into one of those three capsgories
Speaker 4: and try to as much as we can make valuation
Speaker 4: our friend rather than our enemy. But except sometimes it's
Speaker 4: going to be in the middle where it's not really
Speaker 4: a main driver of the decision.
Speaker 6: Just to amplify what Peter said, the other subtlety in
Speaker 6: all this is that in the fund itself, and Peter
Speaker 6: will correct me if I'm wrong, but let's just say
Speaker 6: on average turnover, something like ten percent give or take
Speaker 6: implies a ten year holding period, which is in fact
Speaker 6: the empirical data would suggest that we do hold things
Speaker 6: for that long and longer. If you're going to own
Speaker 6: something for ten years and you're going to allow time
Speaker 6: to help you compound value, particularly with you've got to
Speaker 6: give it in growth underneath it. There's not a lot
Speaker 6: of information in a two year pe ratio. There's a
Speaker 6: mismatch there. So we would have missed so much if
Speaker 6: we had gotten frightened one way or the other by
Speaker 6: valuation on a lot of the stocks that we've bonne
Speaker 6: through time. So that disconnect is something that I think
Speaker 6: Peter and I both have sort of ingrained in our
Speaker 6: heads now.
Speaker 4: Some of the word stocks that we've ever owned were
Speaker 4: some of the cheapest on traditional valuation measures, and a
Speaker 4: lot of the best stocks we've owned were the most expensive,
Speaker 4: and if we had gotten too fixated on the valuation,
Speaker 4: it would have caused us to sell them. So we've learned,
Speaker 4: as Don said, let's focus on finding the right businesses
Speaker 4: and then valuation becomes the last piece, just to say, okay,
Speaker 4: are we do we think we're comfortable owning it at
Speaker 4: this valuation? There are rare times when evaluation becomes so
Speaker 4: extreme that it becomes more of a driver of decision making.
Speaker 5: But those those moments are pretty rare.
Speaker 6: Remember, just to close the loop on yield, I think Michael,
Speaker 6: you you met, you asked about yield earlier on that
Speaker 6: you know, by and large, high yields tend to be attractive,
Speaker 6: but they can also be a signal.
Speaker 3: So high yield were you to be.
Speaker 6: Sort of responsive to that might lead you to a
Speaker 6: place where the market's telling you we don't think this
Speaker 6: dividends sustainable, and that's why it's valued this highly. So again,
Speaker 6: valuation is is, to Peter's point, is something that we
Speaker 6: want to deal with at the end of the process,
Speaker 6: not so much at the beginning.
Speaker 2: Definitely makes sense. And do you consider other uses of capital?
Speaker 2: I know some dividend investors get frustrated with the company
Speaker 2: that pours money back into the business and not returning
Speaker 2: it to shareholders. And do you do you care about
Speaker 2: buybacks and things like that, other uses of capital to
Speaker 2: return money to shareholders.
Speaker 5: Yeah.
Speaker 4: The first thing is for the business that you're looking at,
Speaker 4: what is the right amount for them to invest? That's
Speaker 4: the first question. If you're in a business with a
Speaker 4: lot of growth opportunities. By all means you should be
Speaker 4: investing all your money. We don't have any problem with that.
Speaker 4: We may not invest in your company if you're not
Speaker 4: paying a dividend because you're investing in all but that
Speaker 4: may be the right answer for you.
Speaker 5: That's perfectly fine. So the first thing is are they being.
Speaker 4: Thoughtful about how they're out they're figuring out what they
Speaker 4: should be investing in, and are they doing that. That's
Speaker 4: the first thing. In terms of In terms of shary purchase,
Speaker 4: shary purchases are fine. We have no problem with the
Speaker 4: shary purchase. But it's different than a dividend, and we
Speaker 4: have to recognize that. You know, a dividend is a
Speaker 4: commitment that you make to your shareholders. Typically in the US,
Speaker 4: if you if you set a dividend, you never want
Speaker 4: to cut that dividend. So if you think about what
Speaker 4: that statement is to a management team, that's quite a
Speaker 4: powerful statement. They're saying, we have enough confidence in the
Speaker 4: future cashless streams of this business that we're really confident
Speaker 4: we're never going to have to cut it. So there
Speaker 4: has to be some confidence in the future in the
Speaker 4: future earnings power of the company behind that, or they
Speaker 4: wouldn't do it. A shary purchase. On the other hand,
Speaker 4: you can flex those up and down as you want,
Speaker 4: so it's a much weaker statement about your expectations for
Speaker 4: the future. So there's nothing wrong with it. If you
Speaker 4: have excess cash, by all means do a shary purchase.
Speaker 4: But the dividend is a more powerful signal signal of
Speaker 4: what's happening in the future. Because and this is to
Speaker 4: get to something Don mentioned a minute ago, because a
Speaker 4: dividend is a commitment. It says something about your business.
Speaker 4: It says that there's a lower amplitude probably to your
Speaker 4: future expectations, is a less risk in this company, and
Speaker 4: so therefore we feel comfortable making this commitment if you pay.
Speaker 4: If you do a shary purchase, you're not making that statement.
Speaker 4: You know, it may be totally appropriate. Have a more
Speaker 4: cyclical business, and you have to do it that way,
Speaker 4: perfectly fine, but we just have to recognize it's a
Speaker 4: slightly different thing.
Speaker 6: I've always thought about cheery purchase as something that amplifies
Speaker 6: the good things.
Speaker 3: So there's a pecking order, right.
Speaker 6: We want you to invest in the machine, invest in
Speaker 6: the business, great value. We want you to share that
Speaker 6: with us through that commitment. To Peter's point of a
Speaker 6: dividend and let's grow it over time, that's even better.
Speaker 6: And if you want to buy some stock back at
Speaker 6: the end of all that, that amplifies all the per
Speaker 6: share metrics.
Speaker 3: I personally, I think Peter agrees.
Speaker 6: I would say that the data would suggest that cheery
Speaker 6: purchases over time are not effective, They're not well done.
Speaker 3: The data supports that, I think. But if you're willing,
Speaker 3: if you want to buy some.
Speaker 6: Shares back after we've done those first two things, to
Speaker 6: Peter's point, go for it, because it's just going to
Speaker 6: amplify all the per share stuff.
Speaker 4: To Don's point, think about when companies buymac shares, it's
Speaker 4: when they have a lot of extra money lying around. Usually,
Speaker 4: if you have extra money laying around, your business has
Speaker 4: done well RECs and your stock prices up. So the
Speaker 4: reality is you're going to tend to buy more shares
Speaker 4: back when your stock is more expensive. You know, it's
Speaker 4: rare that a company is able to stockpile cash and
Speaker 4: use it when their stock is cheap.
Speaker 5: Usually they're buying stock at higher prices.
Speaker 4: So that's the reason why there's some slippage in that
Speaker 4: in that number, it just makes you share your purchase
Speaker 4: just slightly less appealing.
Speaker 1: So as a fund analyst, one of the things that
Speaker 1: really interests me about portfolios is I guess sector positioning.
Speaker 1: And so my question to you is the way your
Speaker 1: sectors are allocated right now or just in general, is
Speaker 1: that driven by the stocks themselves or do you kind
Speaker 1: of do any type of sector targeting.
Speaker 4: We don't target sectors. We really build the portfolio, you know,
Speaker 4: from the bottom up. We're looking for companies that have
Speaker 4: the characteristics that we're looking for to grow their dividends,
Speaker 4: and that leads us then to tend to have biases
Speaker 4: and the sectors that we hold, and those biases are
Speaker 4: pretty consistent.
Speaker 5: You know.
Speaker 4: If you think about what we want, we want steady,
Speaker 4: consistent pounding of returns over time. That's going to lead
Speaker 4: us to sectors that have relatively low amplitude. It's going
Speaker 4: to lead us to sectors that generate lots of cash.
Speaker 4: It's going to lead us to sectors that hopefully have
Speaker 4: some growth, but probably not the highest growing sectors. And
Speaker 4: it's going to lead us away from things that have
Speaker 4: a lot of capital intensity, a lot of cyclicality or
Speaker 4: a really high level of uncertainty of what they're doing.
Speaker 4: So we've tended to have a lot of exposure to
Speaker 4: things like healthcare, consumer staples. We've tended to be under
Speaker 4: exposed to things like energy, which are cyclical and capital intensive.
Speaker 4: Our banks as an area where we're typically very under exposed,
Speaker 4: and we've tended to be unde exposed to technology, which
Speaker 4: has been you know, obviously an area that's been really
Speaker 4: attracted for investment over the last number of years. And
Speaker 4: so we've had those structural differences in what we're doing,
Speaker 4: you know, for a long time, and that tends to
Speaker 4: be how we get there. It's important to think about
Speaker 4: technology specifically. We do want every company the portfolio to
Speaker 4: be paying a dividend, and there are a lot of
Speaker 4: companies in technology that own and so that is that
Speaker 4: is limited to some degree, our ability to invest to
Speaker 4: the extent we might want to in the technology sector
Speaker 4: over time. The good news for us is that's changing.
Speaker 4: You know, You've seen several companies in the last year,
Speaker 4: think of Meta Alphabet, Salesforce, dot Com or just three
Speaker 4: that come to buyd that have initiated dividends. So those
Speaker 4: are things that in the past we wouldn't have owned
Speaker 4: because they didn't pay dividends, and now they do, so
Speaker 4: in some sense, our opportunity sets increasing in technology, and
Speaker 4: so that's an area where I think we can have
Speaker 4: more exposure over time than we have historically.
Speaker 1: Yeah, another thing I wanted to ask is do you
Speaker 1: ever consider companies that reduce their dividends or are currently
Speaker 1: not paying dividends but could be in the future.
Speaker 4: We definitely consider them, we have we we don't we
Speaker 4: don't tend to buy them.
Speaker 5: I can't dine.
Speaker 4: Maybe you can think of an example where we've owned
Speaker 4: one that didn't pay a dividend, But we do think
Speaker 4: about it a.
Speaker 5: Lot, and sometimes we'll actually, you know, in our conversations
Speaker 5: with them, you know, talk to them about it.
Speaker 4: And and I think our discipline so far has been
Speaker 4: not to do that, not to buy item in anticipation
Speaker 4: of starting a dividend, but not to say that we
Speaker 4: couldn't ever do that. But it's unlikely that we that
Speaker 4: we would. But we do have conversations with companies that
Speaker 4: don't pay dividends where the metrics clearly support it, and
Speaker 4: so we have a lot of questions for them about
Speaker 4: why aren't you paying a dividend? And sometimes their answers
Speaker 4: to those questions are good and sometimes they're pretty disappointing.
Speaker 4: But until you've actually made that commitment to constrain yourself
Speaker 4: in that way, you know, we've made the decision in
Speaker 4: the past not not to step in front of that.
Speaker 4: We have had cases though, and this happened during COVID
Speaker 4: where a company, you know, cut its dividend think of
Speaker 4: TJ tj X, because the environment was so extreme that
Speaker 4: they needed to.
Speaker 5: It was the responsible thing for them to do.
Speaker 4: And we've continued to hold the company through that because
Speaker 4: in our view they were going to reinstate the dividend.
Speaker 4: They should pay a dividend, but it was the prudent
Speaker 4: thing for them to do in that period of time
Speaker 4: to not pay it. We totally understood that, and so
Speaker 4: we'll sit through that in a way, you know, in
Speaker 4: cases like that, but that's really rare.
Speaker 5: You might have other examples of that.
Speaker 3: Yeah, I go back in time.
Speaker 6: The only the only time that I can recall that
Speaker 6: we owned a stock that cut the dividend in addition
Speaker 6: to TJX, was back in the global financial crisis, and
Speaker 6: that was JP Morgan which probably didn't need to do it,
Speaker 6: but as you can recall, that was sort of a
Speaker 6: team decision in order to calm the industry down.
Speaker 3: We'd like to think.
Speaker 6: That our process is thorough and deep enough that we
Speaker 6: can spot these clouds on the horizon before before they
Speaker 6: they are on top of us. So we've been pretty
Speaker 6: successful at side stepping potential dividend cuts. To Peter's point,
Speaker 6: TJX was a it was proven, it was very well telegraphed.
Speaker 6: The game plan post COVID was very well telegraphed, so
Speaker 6: we had deep confidence that they were going to get
Speaker 6: back on the horse as it related to dividends. But
Speaker 6: generally our approach has helped us avoid those on the
Speaker 6: rare occasion that they that they seem to be.
Speaker 3: On the horizon.
Speaker 1: So another question, I was pretty curious that, you know,
Speaker 1: with the strategy, if you could talk about, you know,
Speaker 1: like one specific success story, like you know, it doesn't
Speaker 1: have to be a current holding, because I know you
Speaker 1: probably can't talk about that anyway, but if you think
Speaker 1: of the past, you know, is there a company that
Speaker 1: you bought and it just worked out really really well?
Speaker 4: You sure I can come with a few, don do
Speaker 4: you want to do, you have one in mind you
Speaker 4: want to start with.
Speaker 3: I would have started with t j X, So I'll
Speaker 3: set that aside. Here's one.
Speaker 6: And this is going to be boring, but I think
Speaker 6: it's really reflective of who we are and what we do.
Speaker 6: And it's and and and the time we purchased it
Speaker 6: was highly controversial, and it's Microsoft, and I'm sure it's
Speaker 6: hard for you to imagine there was a ton of
Speaker 6: controversy for a dibdend growth investor with Microsoft, but there
Speaker 6: really was when we initially purchased it.
Speaker 5: I'm going to get my daates wrong.
Speaker 6: But back right around when the Nokia acquisition and then
Speaker 6: was written off and you had the CEO transition, we uh,
Speaker 6: we had this idea that when when Nokia was when
Speaker 6: the when the Nokia right off was announced, I think
Speaker 6: Peter it was something like six or seven billion dollars
Speaker 6: and the stock was down substantially, and this sort of
Speaker 6: gripped the market with great fear because they were not
Speaker 6: anywhere in.
Speaker 5: Mobile and this attempt to get into mobile.
Speaker 6: Wasn't going to work out, and they're a they're an
Speaker 6: on prem company, and the cloud was going to all
Speaker 6: this sort of magic was happening, all all this controversy
Speaker 6: was happening, And what we concluded was that a seven
Speaker 6: billion dollar right right off which would have been which
Speaker 6: which was screening as a disaster at a company that
Speaker 6: probably had I don't remember the number, but probably fifty
Speaker 6: billion dollars of net cash in the balance sheet, It
Speaker 6: had a monopoly in the enterprise that was not going away,
Speaker 6: and most importantly for us, a magical balance sheet with
Speaker 6: a history and commitment of dividend growth.
Speaker 3: That it was one of the these moments.
Speaker 6: Where we were trying to figure out what it is
Speaker 6: and not what it was and what it would be.
Speaker 6: And so that has been an extraordinarily good stock for
Speaker 6: us over long periods of time.
Speaker 3: It is really the gold standard for what we do.
Speaker 6: But it was a moment in time where you just
Speaker 6: had to look at a company through a very special lens,
Speaker 6: and divedend growth is a very special lens, and if
Speaker 6: you had done that, you would have had a wonderful
Speaker 6: journey and we have.
Speaker 3: So that's one that I think is indicative of what
Speaker 3: we do.
Speaker 4: Yeah, I was going to come to Microsoft as well,
Speaker 4: and I think people sometimes ask you're buying these companies
Speaker 4: that are well known by the market, Why do you
Speaker 4: have opportunities to buy them at valuations that allow you
Speaker 4: to perform? And it's surprising, but it happens. The market
Speaker 4: gets a narrative in its mind that turns out to
Speaker 4: be sort of simplistic or wrong. And if you focus
Speaker 4: on the fundamental metrics of the business and you look
Speaker 4: at what they actually do, you realize that there's value
Speaker 4: there that maybe the market doesn't see. So even these
Speaker 4: I mean, it's not like Microsoft was some undiscovered company, right,
Speaker 4: I call these you know, this is things sitting in
Speaker 4: plain sight. Right, this is these are things that should
Speaker 4: be obvious to everyone. But the market gets a story
Speaker 4: in its head and gets it gets frightened away. You know,
Speaker 4: Microsoft has capabilities and the way that they're embedded in
Speaker 4: all of our organizations is so powerful that they're able
Speaker 4: to encourage us to use the next generation of each
Speaker 4: iteration that they come up with. It's just incredibly powerful.
Speaker 4: I mean, if you think back, for example, to what
Speaker 4: happened during COVID, we were all at home and I
Speaker 4: remember we were using Zoom, we were using WebEx and
Speaker 4: now and I don't know where you are in your
Speaker 4: organization but in our organization we use teams.
Speaker 5: Now why is that.
Speaker 4: It's because we have Microsoft products all over our data
Speaker 4: center and they work really well with teams. And Teams
Speaker 4: wasn't as good of a product as WebEx and Zoom,
Speaker 4: but they got better and better and better, and next
Speaker 4: thing you know, our it people came to us and said, hey,
Speaker 4: you're using teams like that. That's what Microsoft is able
Speaker 4: to do over and over again. So when you have
Speaker 4: a period of time when people are fixated on the
Speaker 4: fact that they had the surface which is terrible relative
Speaker 4: to the iPad, they were missing the underlying power of
Speaker 4: that company.
Speaker 2: And what do you think the biggest macro risks to
Speaker 2: your style are upcoming in you know, the next year
Speaker 2: or two.
Speaker 4: Our style should be very resilient to most sort of
Speaker 4: market environments. I think that the challenge for us is
Speaker 4: we buy companies that are steady compounders of value, and
Speaker 4: that means that the amplitude around our portfolio is lower
Speaker 4: than it is for the broad market. So the periods
Speaker 4: of time when we tend to do worse versus the
Speaker 4: market is when the market's really really strong, when animal
Speaker 4: spirits are running wild.
Speaker 5: You you don't want to own.
Speaker 4: This sort of stodgy approach, right, You want to own
Speaker 4: the stuff that you can tell your friends and neighbors
Speaker 4: about and you're generating really high return. So the challenging
Speaker 4: periods for us on a relative basis versus the market
Speaker 4: are the periods of time and the market's doing great.
Speaker 4: I think about you know what we do as being
Speaker 4: like we're like the steady station wagon Volvo that you're
Speaker 4: driving with the all weather tires on it. You know,
Speaker 4: when the when the when it's really sunny outside, you
Speaker 4: want to drive the flashy red convertible. Our job is
Speaker 4: to have a memory, right to remember that market has
Speaker 4: cycles and when it's when it's summertime, we know that
Speaker 4: it's going to be winter again, and we want to
Speaker 4: build this portfolio to be resilient in all of those environments. Uh,
Speaker 4: And we need to remember that and and stay.
Speaker 5: True to that.
Speaker 4: So so from a from arella standpoint, the periods of time
Speaker 4: when we're going to look most dodgy and just interesting
Speaker 4: to people is when it's summertime and people forget that
Speaker 4: there's a winner around the corner.
Speaker 6: Ad I'd add three macro things that might spook people,
Speaker 6: and these are perceived risks I think having observed this
Speaker 6: for twenty years now, so rates are always something that
Speaker 6: people uh will focus on when they see diven end fund.
Speaker 6: So a higher rate environment makes you know, other instruments
Speaker 6: more attractive, and so people I think will feel less
Speaker 6: positive about.
Speaker 3: The kinds of companies that we that we invest in.
Speaker 6: Tax policy on dividends always rears its head, not always,
Speaker 6: but periodically rears its head. If tax treatment for dividend
Speaker 6: income becomes more onerous, that has that will have the
Speaker 6: perceived a perceived negative.
Speaker 3: Impact on the companies we own.
Speaker 6: But what we've discovered through time is that tax policy,
Speaker 6: at least at the company level, has almost zero impact
Speaker 6: on dimenend policy.
Speaker 3: So if you're a.
Speaker 6: Reliable dividend grow it's a very clear part of your
Speaker 6: capital allocation strategy. Taxes rarely, if ever enter into your
Speaker 6: calculus when you're forming dimenend policy.
Speaker 3: So there'll be these perceived I think risks.
Speaker 6: From a macro perspective, rates and taxes would be the
Speaker 6: two biggest, But what we've noticed over time is that
Speaker 6: it really doesn't impact the companies or the portfolio. To
Speaker 6: Peter's point, where I forget what you said, a Volvo,
Speaker 6: but we're Volvough and there's a lot of history to
Speaker 6: back that.
Speaker 4: Know, not the company Volvo, but the car. Right, We're
Speaker 4: like the ugly station wagon with the all weather tires
Speaker 4: that it's not exciting, but it works for you in every.
Speaker 5: Season, makes sense.
Speaker 1: This is a great conversation. I wanted to thank you
Speaker 1: Don and Peter, and also Don, I wanted to congratulate
Speaker 1: you on your retirement later this year. Thank you so much, Mike.
Speaker 1: Thank you for joining me as my cost today. Yeah,
Speaker 1: thank you all. Thank you for listening. If you liked
Speaker 1: the episode, please subscribe and leave a review. Also, if
Speaker 1: you'd like to see more of our research, go to
Speaker 1: the Terminal BI Fund go and BI stocks go Until
Speaker 1: our next episode, this is David Cole with the inside Act.