Mercedes and European Banks Are Leading in Shareholder Capital Returns

During their recent episode, Taylor, Carlisle, and Matthew Fine discussed Mercedes and European Banks Are Leading in Shareholder Capital Returns. Here’s an excerpt from the episode:

Matthew: Yeah. Maybe that’s the side of the top. I haven’t explicitly focused the way that he has on companies that are returning a lot of capital. But it’s happened almost accidentally. And I nowhere close in my career have I managed a portfolio that’s returning as much capital as exists in the portfolio today.

I think that it’s a combination of a couple things. One is the investment philosophy itself. So, we start with cheap companies and we start with super well financed companies. We try our best, although this is probably the hardest part of the process, but try to align ourselves with management teams that are going to act sensibly, do smart things, not destroy the capital.

So, when a company makes a dollar of profit, it’s got a choice about what it can do with that dollar of profit. It can reinvest in the business at some rate, or it can go dividend it out and buy back shares. When the shares are trading at something like five or six times earnings, which is really common in the Third Avenue Value Fund today, you’ve got whatever that is, 16% to 20% earnings yield on your reinvestment in the buyback.

It’s very hard. There aren’t a lot of businesses that offer 20% return on invested capital to put that money back into the business. If you’ve started already with companies that are super well financed and have already have excess resources, you’re going to get a lot of capital return. So, it’s happening all over the place.

The auto OEM space is a great example. Mercedes is the extreme example, actually, where they said, “We’re going to pay out this ordinary dividend, which is a high single digit number, like 7% or 8% yield.” I don’t have a current number in front of me, but 7% or 8% yield, something like that on a current basis. And then, after that dividend, they’re going to take 100% of the free cash flows from its automotive business and distribute those back to shareholders, because they have like 30 billion euros of net cash at the automotive business already. They have more money than they know what to do with. So, they’re going to return basically 100% of the free cash flows.

The European banks, there’s a lot of that going on where you’ve got super well financed companies paying it back, dividends, share buybacks, Bank of Ireland, Deutsche, which both of them which we own are doing exactly that. And then, in Japan, you’re seeing a lot more capital return, although it’s by force and it’s not enough. It’s probably enough to move the meter from a valuation perspective, but it’s nowhere near what it ought to be. So, there’s just a ton of that going on in the portfolio today for all of the reasons that we’re talking about.

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