Motley Fool analyst Jason Moser chats with Rick Engdahl in a side-of-desk interview about developing a personal investment philosophy and shares his own four-point system for deciding whether a particular stock is right for his portfolio.
You've found an industry you like, and a promising company. The next step is to look at who's at the helm. Is the CEO passionate about the business? In this video segment, Jason discusses share buybacks and dividends as an indication of management's attitude toward its shareholders.
A full transcript follows the video.
Rick Engdahl: When it comes to trusting management, I think you wrote in your article, "Do you trust the management to do the right thing?"
What is the right thing? What do you mean by that? Is it how they serve shareholders, specifically, or is it how they lead the company into the future, or what they're doing to affect the world around them? What is "do the right thing," to you?
Jason Moser: I think it's a little bit of a lot of those things. I think that one of the things you'll learn about management as you go on is you see how they treat shareholders, for example. I think that management teams that look out for shareholders are really important, because we, as shareholders, are putting our capital on the line to try to be a part of this story, be a part of this company's future.
You can see companies where maybe they have this really exciting runway ahead, and it's a growth company, and they need to reinvest all of their money to really help fund that growth, but all of a sudden you see management get out there, and maybe they borrow some money to buy back some shares, because share repurchases make a great headline, and they just think that's more confidence that they have in the stock and investors will really appreciate that.
I think that, for the most part, management tends to get share buybacks wrong. They tend to bungle them. But I think that's a good example of something that you could look at over time and say, if there's a management team that has done a great job over time of opportunistically buying back shares when they represent a fair value or a great value, that's something to really keep an eye on.
If you have management teams that are just consistently buying back shares just to offset dilution for their compensation, well, that's another, because essentially shareholders are footing that bill. You can see, just through time ... you can look at things where you can see through time how they do that.
Is that something that they have a habit of doing over and over again? If you see that, then maybe they don't necessarily think about shareholders first.
Dividends, I think, are another great idea. What if we have a company that's pretty well established, that generates a lot of money, and they don't have to really fund so much for the growth of the company anymore because it's relatively big? We like to see those companies try to spit off some of that cash in the form of dividends for shareholders, right?
What if they're not really doing that, or what if they're not really raising the dividend over time? What are they doing with that money? Is it going into other ventures, or are they looking at other ways to try to grow the business? You can get an idea there.
Does management have a stake in the game? Does management own shares of the company? I think of something like LinkedIn (NYSE:LNKD.DL), for example, and the co-founder Reid Hoffman and CEO Jeff Weiner, who have a tremendous stake in the company.
I think that you can see, time and time again -- every quarter they report their results, every presentation they give -- there's an enthusiasm and a passion that comes across when these guys talk, that you can't put a quantity on it. You can't really quantify it, but you can see it and you can feel it.
To me, when I see a passionate management team like that, I think that's something that people ought to take note of. Jeff Bezos with [Amazon.com (NASDAQ:AMZN)] is another great example -- Howard Schultz with Starbucks (NASDAQ:SBUX) -- those are guys that, to me, just show a passion and a love for what they're doing.
It's not necessarily one behavior they're committing, but it's just this history that they're building over time of how they see the world and why they're growing their business. Those are things that I think, over time, you can find more out about them.