During his recent interview with the RIA Channel, Bill Nygren outlines his three key criteria for selecting companies. First, the stock must be priced cheaply relative to intrinsic value. Second, the management team should be high quality and act like owners, with a long-term focus on maximizing per-share value.
Third, to avoid value traps, Nygren seeks companies where the combined business value growth and dividend yield exceed the expected 8% return of the S&P 500. This approach allows for a long-term investment horizon, unlike deep value buyers who rely on quick turnarounds for companies whose best days are behind them.
Here’s an excerpt from the interview:
Nygren: Well, at Oakmark, we say there are three things we look for in any company. The first is a cheap price relative to our estimate of intrinsic value. The second is a management team that we think is not just high quality, but thinks and acts like owners. So, long term focus on maximizing per share business value.
And the third thing is specifically designed to avoid value traps. And that’s we look for companies where we believe the combination of business value growth and dividend yield exceeds what we expect for the S&P 500. So the S&P 500 today we would say you’d expect growth of six to 7%, pays a dividend yield a little under two, so something like an 8% annual return.
We don’t care if we get that through dividend yield or expected per share growth, but we want our company to have the combination to exceed 8%. And that gives us the luxury of a really long time horizon. A lot of deep value buyers buy companies where their best days are in the rear-view mirror.
And with those kind of companies, you need something to happen quickly because the business value might actually be declining as each year goes by. So for us demanding the business value per share grows consistent with the market, that really gives us the luxury of the long time frame.
You can find the entire interview here:
Bill Nygren Interview – RIA Channel
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