In this clip from the Industry Focus: Tech, Sean O'Reilly and Dylan Lewis talk about how, in the midst of the worst bear market of the '70s, Henry Singleton of Teledyne Technologies (TDY 1.01%) pulled off such a successful buyback program, that famously tech-averse investor Warren Buffett bought in. They also explain how buyback programs work in general, and how companies can make money from them when they're executed well.
A full transcript follows the video.
This podcast was recorded on April 15, 2016.
Sean O'Reilly: Yeah, one of my favorite examples, and this is going back a while, when we were coming up with the ideas for this show, and it sounds crazy that Buffett would do this, but Buffett actually bought a tech stock in the 1970s.
Dylan Lewis: Did he?
O'Reilly: Yeah. You grow up, and you're like, "Oh, yeah, Buffett doesn't buy tech stocks, he buys Coca-Cola."
Lewis: Yeah, he likes boring companies.
O'Reilly: Yeah. It's because they're steady and predictable, Dylan, come on! But, it's specifically for the reasons we're talking about. They made this really great shift to being a responsible capital allocator in buying back shares and all that good stuff. Under the leadership of Henry Singleton in the 1970s, Teledyne Technologies, this was, like, a quasi-defense contractor tech firm. It was actually a remnant; it was originally founded in 1960 and was part of the 1960s conglomerate boom. We're going back 40 years here, but finance doesn't change much. But then, the 1970s bear market happened, and if you thought that 2008-2009 was bad, 1973-1974 were equally as bad. The average multiple on the S&P 500 was, like, 7. It was low, it was really bad.
Lewis: It sounds like you're leading to a buying opportunity.
O'Reilly: Yeah, no, so, what Singleton did was, their stock dropped from like $40 to $8, and he had issued a ton of shares into the conglomerate boom, they had all this cash lying around, they had all these arguably stable, great defense contractor-y-type stable businesses. They started buying back tons of stock. Over the ensuing 10 years, earnings went up 89%, shares went up --
Lewis: Individual share price?
O'Reilly: Yeah. This is really good. Annual income increased by 89%, and net income increased by 315%. The stock, on the other hand, went from $8 -- now, remember the high previously was $40 -- to, by the end of the decade, $175.
Lewis: Wow!
O'Reilly: Because of all these share buybacks. This is better than a 17-bagger. And it was all just because this engineer CEO of a tech firm was smart enough to know, "Yeah, we probably shouldn't buy other businesses, we probably shouldn't invest in R&D, we should probably just buy back our shares, because we're trading at a ridiculously low valuation compared to where we should be."
Lewis: And of course, part of that share price appreciation is the fact that the pie is being split in much fewer slices, once business prospects turn around.
O'Reilly: Yeah. The share count goes down, and even if your net income stays the same, the piece of the pie is increasing, and your earnings per share go up, and the earnings that you own or have claim on, are higher.
Lewis: And I think that perfectly highlights one of the big advantages of repurchase plans and that style of capital allocation, where you have the opportunity to opportunistically buy when shares are low and take advantage, possibly, of the market undervaluing a company. Obviously, who should know better about the prospects of a business over the next couple years than the people managing it?
O'Reilly: Yeah.
Lewis: One would think.
