The Manual of Ideas – The Proven Framework for Finding the Best Value Investments : [PDF Download]

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“Capital allocation choices that may be optimal for one business at one time may be inappropriate under different circumstances. Investors sometimes act in knee-jerk fashion, advocating dogmatically for share repurchases as the top capital allocation priority.

This seems to make sense from a shareholder’s vantage point, as the act of becoming and remaining a shareholder typically reflects an investor’s judgment that the shares of a company are selling for less than fair value.

Buying back stock seems like a sensible priority. Unfortunately, investors are fallible when it comes to portfolio decisions. By extension, they may misjudge the wisdom of share repurchases. Shrewd CEOs have an opportunity to protect shareholders from an overly optimistic assessment of equity value.

Repurchases destroy value if management overpays for stock or leverages the balance sheet to the point at which the equity becomes vulnerable to a cyclical downturn. Repurchases may also add less value than would reinvestment of capital in a growing business with attractive returns on capital.

Lisa Rapuano sums up her preferences as follows: “We like companies that buy back stock when it is low and don’t when it is high, or that pay out special dividends when the cash is not deployable for a good return.

We like companies that eschew acquisitions or store openings or other capital deployments when they think the price is too high.”

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