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RIIQ Newsletter

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Every Sunday morning, we publish a free write-up within our RIIQ Newsletter with leading insight and analysis — the aim is to help investors of all skill levels focus on key fundamentals, gain confidence in developing an investment strategy, and gain an edge in the push to generate true wealth.

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How to Make Money in Stocks

Great Management is Aligned With Shareholders to Create True Value

Intro

Apple is one of the greatest investments of all time. However, the main reason for its success isn’t just what you might expect.

Yes, they have impressive numbers, but what sets them apart is their management team’s commitment to giving back to shareholders.

If you're looking to discover the next Apple and potentially multiply your investment by 10 times, this brief write-up is a must-read.

Let’s dive in!

A Great Management Is Everything

The legendary investor Charlie Munger once said, “You do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And, of course, that's hog heaven day.”

So what does great management do? Here are four key points to consider (the last point is vital):

Remember, we’re looking at this solely from an investor's perspective—this isn’t management school!

1. Aligned Interests: A great manager ensures their goals resonate with shareholders, fostering trust and commitment.

2. Clear Messaging: They communicate the company’s vision, performance, and challenges honestly, allowing investors to be informed accurately and timely.

3. Transparency: A focus on transparency builds confidence among investors, as they can understand the company's direction and business decisions.

4. Returning Value: Prioritizing value return to shareholders through reinvestment at above-average returns, issuing dividends, or conducting stock repurchases signals confidence in the company's future.

Without a focus on returning value, the stock’s performance will begin to suffer. Business will suffer in the long-run and shareholders will lose confidence if the stock doesn’t perform well. Under such circumstances, you’re not making any money.

Let’s dive deeper into that last bullet.

Dividends Vs. Stock Repurchases

As a shareholder, you can get paid in two primary ways:

1. Dividends: Regular cash payments made to shareholders from a company’s profits.

2. Capital Gains: Profits earned from selling shares at a higher price than you bought them, at times enhanced by a company’s share repurchases.

But the big question is, which is better?

1. Impact on Shareholder Value

Dividends: Provide immediate cash returns to shareholders, enhancing income and creating a sense of financial stability.

Share Buybacks: Reduce the number of outstanding shares, potentially increasing earnings per share (EPS) and the stock price over time, benefiting shareholders through capital appreciation.

Pay close attention to a company’s buyback program, though. Buybacks potentially increase shareholder value if the company is shrewdly embarking upon its repurchases. Share repurchases add to shareholder value only if the purchases are made at prices below intrinsic business value.  Pay above intrinsic business value and shareholder value will suffer.

2. Tax Implications

Dividends: Taxed as income at the shareholder's ordinary income tax rate, which can be higher than capital gains tax rates for some investors.

Share Buybacks: Typically more tax-efficient, as shareholders are only taxed when they sell their shares, allowing them to defer taxes until they realize gains.

3. Signal of Company Health

Dividends: A consistent or increasing dividend payout signals strong cash flow and financial stability, suggesting the company is confident in its ongoing profitability.

Share Buybacks: Indicate that the company believes its stock is undervalued, reflecting confidence in future growth and efficient capital allocation, but may also be perceived as a lack of profitable reinvestment opportunities.

One Thing To Remember

If you have a long-term vision, then buybacks are often the better choice.

Buffett knows this: “Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

And Apple knows this.

Since it began repurchasing shares in 2012, the company has spent over $800 billion on buybacks, creating tremendous value for shareholders.

It’s no surprise that Apple has become one of the greatest investments ever.

Conclusion

So, if you want to succeed in the stock market, look for companies that actively buy back their own stock!

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP.

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