Thread by @RamBhupatiraju

One of my all-time favorite articles on "Capital Allocation". A crash course on the topic. h/t Gary Mishuris.👏

✔️Internal Growth
✔️Acquisitions
✔️Reduce Debt
✔️Share Buybacks
✔️Dividends

behavioralvalueinvestor.com/blog/capital-a…

Some basic info ⬇️

Capital Allocation Don'ts ⬇️

Such an important topic when analyzing Management's track record and checking if they are pursuing the right strategy/opportunities.

During good times, it's very easy for Management teams to throw money at projects for growth purpose, pursue expensive acquisitions..

..and leverage the Balance sheet to fund them.

If not being careful, during bad times they could easily turn into loss incurring projects, write-down inducing acquisitions and debt load leading to bankruptcy.

Always check if the growth and acquisitions are value enhancing & increasing the long-term competitive positioning of the Company, while not putting the company at financial risk.

For your specific investing strategy, pick the Management teams (& companies) that are exemplifying the right capital allocation strategies in the right order.

As I'm mostly focused on Quality and growth, I prefer this order.

1⃣ Internal growth (primarily funded by internal cashflows, only then by easily serviceable debt & only occasional dilution). Visionary Mgmt Teams with Co.'s in the biggest/sustainable trends can get a lot of runway with growth in primary areas (adjacencies), geographies etc.

2⃣ Smart acquisitions (preferably during non-hype times in the Market) that strengthen their offerings, making them more stickier and increase the switching costs and or pricing power.

3⃣ Debt : To be on the conservative side (given the Industry), taking advantage of low interest rates to find high return projects, and not putting the company at Financial risk.

4⃣ Share buybacks : If the company is FCF generating, and based on the stock price if buybacks are a better allocation than the top3. Either do it consistently or have a good idea of the intrinsic value of the company and time it properly (with some contrarianism).

5⃣ Dividends : Not my initial focus for buying the stock (unless it's a REIT/MLP bought for dividend purpose), but if the company is still high quality, still growing, easily funding the dividend and slowly increasing it, I'll take it.

/END.