The Enormous Advantage of Great Management

As Managing Director and Head of Global Financial Strategies at Credit Suisse, Michael Mauboussin advises clients on valuation and portfolio positioning, capital markets theory, and competitive strategy analysis. He has also authored three books -- Think Twice, The Success Equation, and More Than You Know -- and is an adjunct professor of finance at the Columbia Business School, and chairman of the Board of Trustees at the Santa Fe Institute.

Buying back stock is tantamount to paying a dividend, Mauboussin says, because stockholders can simply sell. But what happens when a company doesn't do either? Is it investing its cash wisely, or simply letting it accumulate?

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A transcript follows the video.

Matt Koppenheffer: Then, looking at a specific company, it's not necessarily a bad thing if they don't pay that big dividend -- and I guess that partially goes back to what you were talking about, about investment opportunities within a company.

Michael Mauboussin: That's a great point, Matt. That's the thing. If they're not paying a dividend or repurchasing shares, what are they doing with the money? If they're investing it at a very high rate of return, more power to them.

Koppenheffer: Like Buffett.

Mauboussin: That's what we want. But if they can't, then it's perfectly reasonable -- and I think even appropriate and maybe responsible -- for them to give the money back to the shareholders. The reason is, of course, you in turn can take that money and invest it in something else if you so choose.

By the way, buying back stock is tantamount to paying a dividend, because you can sell. It's interesting; when a company buys back your stock, if you do nothing, it's actually an act of decision, because you're effectively increasing your ownership stake in the company. You can create a synthetic dividend by selling the same proportion as they're buying back, so you'll have a little cash and you'll still have the same proportion of the company. Then you could take this money, you can reinvest it or do whatever you'd like.

But that is an important consideration in the buyback dividend debate is, does the company have investment opportunities they should be funding, or not? By the way, some of the problem is we have some of these companies that are earning so much, they're building up these huge cash balances. They can't even find things to do with the money -- some of these big technology companies, for instance.

Koppenheffer: Just spitballing, would the right thing be for them to start distributing that, if they don't have the place to put it?

Mauboussin: I think the answer is yes, and I think there's been a lot of pressure for them to do that. Slide the money back into the capital markets, and let the capital markets reallocate it if you can't do something with it.

The idea there is that markets are pretty good at figuring this stuff out. It's not perfect, clearly, but pretty good at this. The question is, this company that's sitting on a lot of cash, is there an investment opportunity that's being starved now, as a consequence, if that money went back in?

I think from a systemwide point of view, that discipline of returning cash to the capital markets makes enormous amounts of sense.


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