Author: Raoji

The Book-‘The Outsiders-Eight Unconventional CEOs and their radically rational blueprint for success’ is written by William Thorndike.

The Book got the rare honour of being recommended by Warren Buffett in his Berkshire Hathway Shareholder Meeting, 2012

What makes for a good CEO?The answer is capital allocation.

CEOs who can allocate capital well are the ones who are able to reward shareholders.

The Book covers the corporate tales of Eight Extra-ordinary CEOs who were able to generate returns to shareholders in excess of 20% per annum handily beating their peers and the broader indices.

How were they able to do so?The Book offers some clues:

• Getting rid of businesses which gave below par returns
• Focussing on cash,cash and cash
• Running lean operations
• Doing buybacks when their own stock traded below intrinsic value
• Doing acquisitions with cash when their stock traded cheap and with their stock when it traded expensive
• Using spinoffs to generate shareholder returns
• Eschewing dividends as it a tax-inefficient way of using capital
• Focusing on tax saving strategies and post-tax returns
• Incentive structures where employees own shares

While the stories in the Book are of the Titans of American Business such as Buffett,Tom Murphy,Malone etc, there are easy parallels to be found in the Indian context.

For instance, shareholders in PEL have benefited tremendously as Ajay Piramal is a master of capital allocation.He not only got a great price for his pharma business but was also able to deploy the capital effectively

Another example of a CEO trying to allocate capital judiciously and sell non-core businesses is N Chandra,Chairperson of Tata Sons.His moves should improve shareholder returns significantly.

A good example of a super smart CEO using his expensive stock to acquire is Uday Kotak.He got ING Vysya for almost free !

Do buy this book to know which CEOs to bet on.

The Book ‘Share Holder Yield-A Better Approach to Dividend Investing’ is written by well known researcher and fund manager Mebane Faber.

The # 1 job of a CEO is capital allocation.The way he allocates capital determines the success of the company and hence the stock price.

A CEO can deploy capital in only 5 ways:

1.Invest in Existing Operations

2.Acquire other businesses

3.Pay down debt

4.Pay dividends

5.Buy back shares

The Book uses Options 3,4 and 5 to determine the attractiveness of the stock from an investment perspective.

Some financial terms to be noted here:

Dividend Yield=(Trailing 12 months cash dividends)/Market Cap

Net Buyback Yield=(Trailing 12 Months Stock Repurchases-Stock Issuances)/Market Cap

Net Debt Paydown Yield =(Net changes in short &long term debt)/ Market Cap

Shareholder Yield= Dividend Yield+Net Buyback Yield+Net Debt Paydown Yield

Generally,people who invest for dividends use dividend yields as their sole criteria.

While this was an effective tool in the past, changes in the tax structure have made this less tax efficient companies.In the Indian context, we have seen large payouts to shareholders by companies like TCS,Infosys, Wipro etc by buybacks and not dividends.

Net debt payout is also important for shareholders as lesser the debt,lesser the interest costs and more claims of the shareholders on future cash flows.

Hence the author feels a combination of all three gives rise to a better way of measuring the payout to shareholders.

In his research, the author finds that using Shareholder Yield as a way to screen,rank and select stocks offers superior returns with lower drawdowns than just index investing or any of the other methods used alone.

Do buy the book if interested in quantitative methods of stock selection.