Long ago, I came to the conclusion that those entering into marriage usually fell into one of two categories. Type A believed that they had met the perfect person and married in the hope that that person would never change. Type B believed they had met somebody who could, with a few changes, become the perfect person. Both could be disappointed in the future in different ways, but two type A’s had more chance of long term success than two type B’s.
These two personalities and approaches also manifest themselves in long term investing. Here too, some buy stock in a company because they like what they see and envisage more of the same, while others invest because they believe that, with a push in the right direction, that company could become something they like. In other words, there are passive and active investors.
The giant investment management firm Blackrock (BLK) has traditionally been seen more of a type A than type B. Somebody like Carl Icahn of Icahn enterprises (IEP), however, is decidedly type B. This morning the Wall Street Journal reports that BLK Chief Executive Laurence Fink sent a letter to the CEOs of all S&P 500 companies, urging that they do not follow the trend for raising dividends and buying back shares at the expense of investing in growth. It would seem that the type B personality is winning too many arguments and the change is upsetting the more passive investor.
As always, it isn’t quite that simple. As the Wall Street Journal points out, Blackrock has frequently voted with the advocates of change in corporate boards in the past. Voting for change on the board, however, does not necessarily equate to voting for cash returns to shareholders. This trend towards pushing for dividends and buybacks is what seems to be worrying BLK, and if anything their past record would indicate that they will not be afraid to act decisively if they don’t get their way.
Activist investors have, if nothing else, an image problem. I can only speak for myself, but when I see a fund pushing for this kind of thing, I am instantly suspicious. They have, by definition, already bought the stock and it is hard to escape the feeling that they are pushing for the greatest possible short term return on their investment before ending that particular relationship and moving onto the next one, regardless of the long term consequences. Individual companies can get left behind by focusing on short term returns to shareholders and the economy as a whole needs longer term investment in order to prosper.
My biggest concern about this trend, however, is that, even in a fairly short time, embarking on a program of dividends and buybacks can easily misfire. Back in August of 2012, when I wrote that Apple (AAPL) may be about to top out around $700, part of my reasoning was that the company had given in to pressure for just such a program. They were sitting on a huge pile of cash, but Steve Jobs’ prior refusal to consider such things suggested that they were always looking for opportunities to grow. Returning cash to shareholders created the impression that they had run out of ideas after the iconic founder and CEO had passed away. It may well be that that was and is not the case, but in markets, perception is reality.
Now that said program is well underway, however, my long term view of AAPL is back to being positive. There is nothing wrong with returning profit to shareholders; ultimately that is why companies exist and investors invest. What is a problem is when that decision is perceived to be made at the behest of shareholders whose long term commitment is questionable. We are frequently reminded that corporations are people, and just like people, they have to order their priorities at times. When the focus is on passing profit to shareholders it isn’t on seeking new growth opportunities.
At some point, all successful companies like all successful marriages, mature, but that maturation comes at different times for each company or couple. Microsoft (MSFT), it seems, reached it a while ago and now has its slippers on and feet up while watching TV, while Google (GOOG) is still resisting and wants to go out partying every night.
The three year chart for both companies, as shown above, demonstrates that both approaches can be beneficial to shareholders. What really matters is not whether a company uses some cash to return value to investors, but rather what they do with the balance. It is quite possible for a value stock to appreciate, or grow, and for a growth stock to represent value.
Given that, the ideal investment is in a company that pays a dividend that can be re-invested but still has the opportunity to grow. That is where I believe AAPL is right now. Ultimately, the performance of the stock over the next few years will depend on new product innovation, but, at least for now, AAPL seems to offer the best of both worlds.
Mr. Fink’s letter to CEOs could well be an agent for change in the prevalent culture of using profits for the short term benefit of shareholders. Resisting the temptation to oil the squeaky wheel of an activist investor becomes a lot easier with the knowledge that there is a strong, silent type sitting in the wings who could potentially express their displeasure, not with appearances on CNBC, but by simply electing new directors.
In case you are wondering, I have been happily married for over twenty years. I am more of a type A, while my wife has some type B tendencies. This hasn’t been a barrier to our happiness as we have both learned to moderate our approach and expectations to stay invested for the long term. If investors and corporations can do the same, then the long term outlook for the economy can only benefit.