Morningstar - Q3 2022 - 58

Investors
purposes. When I'm put into a store, I want to be
able to shop all the aisles. I have my definition
of what value is, and I really don't need Russell or
S&P to tell me what that is. If you remember,
for example, bank stocks at one point after the
financial crisis became growth stocks, because
they had very high multiples and had lost a
lot of book value. That made no sense. For us, it's
what we pay for a dollar's worth of free cash flow.
We also have an internal benchmark, because
I can't own non-dividend-paying stocks. I'm a big
fan of Warren Buffett, but I can't own Berkshire
Hathaway BRK.A, because it's a non-dividendpaying
stock. So, we don't own it, which has hurt
us. I find it sort of ironic, because most of the
stocks that he owns are dividend-paying, but he
hasn't decided to pay one yet.
For us, it's about risk-adjusted returns. I started my
career at a trust bank, and I have that sense
of fiduciary responsibility. I'm very aware that I'm
running other people's money.
Hart: I look for quality companies at a reasonable
valuation that pay a minimum 2% yield at
time of purchase. What I consider success is to
make as much money for people as possible
while staying true to our mandate. In terms of
benchmarks, some people use the Russell
1000 Value, some clients use the Russell 1000,
I have investors in the U.K. that use the S&P
500. I have no control over how Russell and S&P
build their benchmarks. It's hard enough to
find a quality company at a reasonable valuation
that pays a dividend yield. [Thinking about]
what benchmark it's in? That's not going to deliver
value to people. My objective is to do what
I say I'm going to do.
Allocating Capital
Thomas: How do you think about share buybacks?
Some argue that shareholder yield-the dividend yield
plus share buybacks-is important. I think all three of
you are skeptical about buybacks.
Hart: I think about dividends as returning money
to shareholders. Some management teams
include buybacks in that. But I put buybacks in
another bucket. If you're doing buybacks,
it's versus M&A. So, if the company's doing an
acquisition or buying a piece of something,
I always want to know, how does that offer better
returns to me as the equity investor versus
buying back your own stock?
I don't cringe when I see my companies buying
back stock. I'm not jealous that they're not
giving me more of a dividend, because I'm an
equity investor, too. I am not opposed to buybacks
if they're done carefully at a good valuation.
Dividends are not defensive.
What's defensive is quality.
Scott Davis
58
Morningstar Q3 2022
Davis: Sometimes buybacks are just used to
offset options. If it's done right, you have a sense
of what the intrinsic value of your firm is.
But often, it's not really thought through. It's sort
of automatic; it doesn't seem to matter where
the price is. I find banks interesting, because the
times when most should be buying back
their stock, they can't because they're not allowed
to. I'm sure Jamie Dimon would have loved to
have bought stock back two years ago.
One of my favorite questions of a CEO is what
was the average price that you bought back your
stock at over the last five years? I remember
talking to the CEO of Pfizer PFE when the stock
was $15 a share, and he told me his average
https://www.morningstar.com/stocks/xnys/brk.a/quote https://www.morningstar.com/stocks/xnys/brk.a/quote https://www.morningstar.com/stocks/xnys/pfe/quote
Morningstar - Q3 2022

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