Cash is King: How Stable Capital Structures Define Reliable Businesses

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Jakab discussed Cash is King: How Stable Capital Structures Define Reliable Businesses. Here’s an excerpt from the episode:

Spencer: Yeah. This obviously doesn’t really apply to the meme stocks and things like that, but I feel like what’s really precious- I apologize. My dog is barking. He won’t stop if I ask him to [Jake laughs] stop barking- is what a company does with its cash and does consistently with its cash. Cash is precious. You can print up more shares, you can’t print up more cash. And so, companies that act in a very, very consistent way in terms of their capital structure, I think tend to be some of the best companies.

I’m thinking off the top of my head, Costco and AutoZone, that I’ve observed that they are very, very consistent at not expanding too quickly, not empire building. Having a very consistent degree of leverage, a very consistent cash payout shareholder yield between buybacks and dividends. They don’t vary it. They don’t try to time the market. I just find one of the dumbest things that people will say is, “This company did stock buybacks last year when the share price was $90, and now the share price is $60. And as a shareholder, I’m outraged that they wasted money.” Well, you were a shareholder at $90. You didn’t see that the stock [Tobias laughs] was going to go to $60, why didn’t you sell if you felt that way? Hindsight is 2020. We do know that companies are very poor market timers.

Jake: They are counter cyclical.

Spencer: Totally. Unfortunately, it’s countercyclical, and wealth mutual fund investors and everything else. It’s all like, you should zig when they’re zagging. That’s the bad thing about buybacks, whereas financially, it’s very similar to a dividend, except you’re not committing yourself. It’s an embarrassing climb down if you cut your dividend, whereas if you just quietly halt buybacks or a program comes to an end or whatever, it’s totally at your discretion, and so companies tend to make bad choices. Those companies that are very consistent across a cycle in terms of how they deploy cash, which they can’t create, I think those are the ones that have skin in the game.

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