Many people asked how to evaluate the management’s ability. Unlike calculating ratios, it is one of the non-quantitative factors. It involves a bit of science and a bit of art. By the term, Management, I meant to loosely mean the company directors and the company executives taken collectively even though they are supposed to play different roles in their respective positions. The point here is that most of us do not have the luxury of knowing them personally. Even if we do, it can be very different from the perspective of personal friends and from the perspective of shareholders. Many people mentioned that the only way to know the management personally is to be a shareholder and, by the time, we get to know them better, we have already had a stake in the company. This means our fate as far as the company is concerned is now in their hands. If the management turns out to be a lousy one, it is hard to get out because the share price keeps falling. It is true. Usually, a falling share price has a lot to do with how a company is managed. Similarly, the reverse is also true. Well managed companies are ones that will become the blue-chips of tomorrow. Very often, the types of products are not the driving factor that affects the share price. It is usually how a company is managed that drives the share price. Remember, resources cannot simply move by themselves and a company’s fund cannot be operated by itself without the management’s hands in it. While I do not wish to mention unworthy companies (unless you are my student discussing in a private setting) in this public space, good companies certainly deserve a mention.
Take a look at Venture Corporation. When I first got to know about this company, it was still in Sesdaq (a predecessor of catalist) in the 90s. Its share price was about $4. Today, it is trading at north of $9 paying out a dividend of $500 per 1000 shares. Of course, depending on the way we look at it, paying out high dividend does not necessary mean that the company is investible. However, if the company is able to dish out high dividend at a high payout ratio in a sustainable way, it does throw some light on the company’s good financial management. Certainly, the company would not be able to do it if the debts are high and its ability to keep its debts low provides further endorsement of the management’s financial management capability. As a quick glimpse, the total debt was $92.7m against the quarterly revenue of $680m, which should translate to about $2.5-$3.0b for the 4 quarters. [Note: This is not an advice to buy or sell this stock as the key favourable factors have already been built in the price of the stock.]
I remember another company – Cerebos Pacific. I had held the stock for many years buying in consistently with an average price of $2.50 per share in the early 2000s. It paid, without fail, a normal dividend of 6 cents and a special dividend of 9 cents making a total dividend of 25 cents every year. This translates to a yield of about 10% per year. The reason for its ability to pay the special dividend was clearly its low debts position. The company’s finance cost was only around $3.5 to $3.9m compare to the revenue to nearly $1b for the last reported financial year. After 10 years of receiving the dividends, it can almost be said that we did not pay anything for the stock (apart from taking into consideration of time value of money, of course.) When the parent company Suntory Ltd took it private in 2012, the offer was a whopping $6.60 per share. While the company is giving out special dividends, the company was actually in the midst of building new manufacturing plants in Thailand. This meant that cash flow of the business had to be so strong that the management could continue to distribute special dividends to shareholders.
While I am not saying that low debt is always good as it sometimes meant that the company is not optimising its sources of fund, but we can tell over time that management is consistently managing its finance prudently, increasing value for the company and enabling dividends to be paid out consistently without affecting the company’s cash flow.
Perhaps, the next time, we should be talking about negative companies. Until then, enjoy your investing journey.
Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned herein. The numbers used are the past performances and they do not represent future performances.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.