It has been more than half a year since I last published here. First of all, thanks for all the emails and messages during my "absence." I have been doing fine and still been busy with finding and following high-quality, investable businesses as usual. As mentioned in the past, these companies are scarce species. Meanwhile, my "land of opportunity" shrinks as the market keeps rising. As a result, there seems less and less that I can contribute to this value investing community.
Having said that, today, I can share something about CEOs' letters to shareholders that I have been reading. They are perfect examples of demonstrating shareholder-oriented capital allocation. It should not take long for you to realize these business leaders essentially think like value investors.
The first case is from Brett Roberts, CEO of Credit Acceptance Corp. (CACC, Financial). The 2020 episode of his writing was almost 30 pages long. A large portion of the letter went through, in detail, the historical development of the business over the last few decades, which is a rare endeavor among CEOs of major public companies. In his annual letters, Roberts often emphasized the importance of earning a return on capital above the cost of capital, as well as the preference for share repurchases over dividends. As he wrote in his 2020 letter:
"If we couldn't earn more than our cost of capital, we needed to give that capital back to shareholders."
"[R]epurchasing shares enables shareholders to increase their ownership, receive cash or do both based on their individual circumstances and view of the value of a Credit Acceptance share. (They do both if the proportion of shares they sell is smaller than the ownership stake they gain through the repurchase.) A dividend does not provide similar flexibility."
If reading his letter carefully enough, you may also get a sense of the corporate culture through a story like the one below:
"We have a process where anyone in the Company can send me a message through an internal portal. The messages, referred to as Red Tape Removers, can be anonymous (or not) based on the preference of the sender…
In normal times, a large percentage of Red Tape Removers are, for lack of a better word, complaints…
The early stages of the pandemic were a stressful and chaotic time. Both our team members and our customers were dealing with significant challenges. As the crisis became more difficult, something occurred which I did not expect. The normal steady stream of complaints began to diminish and instead I began to receive a steady stream of positive messages and words of encouragement."
I always favor a founder-led business, but with a sensible capital allocator in charge, I believe Credit Acceptance should be able to serve its owners well over the long haul.
"Companies do not end up doing good for their shareholders… They start – with their commitment to the shareholders – and make good on IT!"
In his 2018 letter, he wrote:
"I have not given up on the plan that was previously discussed – longevity reward for shareholders that register their stock in their name and get rewarded for their loyalty through more company distributions."
He also embraces entrepreneurial spirits. In his 2016 letter, he wrote:
"[N]ever, never focus on what others in our industry are doing. Instead, remain as vigilant on the space – the difference between us and the competition."
Then, in his 2020 letter, Caporella commented:
"We will continue to lead through innovation, masterful execution and relentless focus."
Also of note are his comments in the company's 2014 letter, which read:
"[O]ur flexibility of speed to market and our creativity that leads the industry, places us at the forefront to innovate the gravitating 'crossover' consumer."
There are other CEO letters worth checking out – for instance, the ones from National Research Corp. (NRC, Financial) and Copart Inc. (CPRT, Financial). These letters display traits that are often unique to high-quality management and differentiate them from the average crowd. For example, Michael Hays, the founder and CEO of National Research, was outspoken about his "poor performance" back in 2009 (another rare endeavor):
"Shareholder value is a key performance metric and its trend this past year clearly illustrates very poor performance on my part…
I will avoid the typical management excuses. As well, I will not waste time highlighting revenue and income growth during the year. For a shareholder, the only metric you and I can monetize is share price."
What do all of the companies discussed have in common? They are all high-return, high-growth companies that generate tremendous economic value for long-term shareholders.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. I/We own shares in most of the companies mentioned in the article and may buy/sell shares in them in the near future.
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