Henry Singleton was the co-founder of Teledyne. It was, like Buffett’s Berkshire Hathaway, a conglomerate of many kinds of businesses. Singleton ran the company for many years, from its founding in 1960 through 1986. His story is rich in wisdom on markets and how to beat them.

Warren Buffett says Harry E. Singleton had the best track record of any industrialist in the history of American business. That’s very high praise from a guy who may be the greatest investor of all time.

In his book, Money Masters of Our Time, John Train writes: “The failure of business schools to study men like Singleton is a crime, [Buffett] says. Instead, they hold up as models executives cut from a McKinsey & Co. cookie cutter.”

First, let’s take a quick look at that track record, and then we’ll look at one of the keys to his success — what I call “Singleton’s secret” — and how we can use that insight in our own investing. Teledyne went from $100,000 in profits in 1960 to $238 million in 1986. Shareholders’ equity grew from $2.5 million to over $1.6 billion. Those returns, needless to say, crushed the market over time — by a multiple of nearly four.

But what became Singleton’s signature mark was his pioneering use of the stock buyback. A stock buyback is when a company buys back its own shares.

The wisdom of buybacks is pretty simple…assuming the stock is cheap. As Warren Buffett wrote in his 1980 annual letter, “If a fine business is selling in the marketplace for far less than its intrinsic value, what more certain or more profitable utilization of capital can there be than significant enlargement of the interest of all owners at that bargain price?”

Singleton did this more than anybody. When his stock was high, he used it to buy other businesses. In fact, he bought hundreds of businesses over the years. When his stock was low, he bought stock back.

Today’s CEOs don’t always get the playbook, though. They think regularly buying back stock is a good thing, like paying a regular dividend. They don’t seem to get that it works only if you buy back the stock at cheap prices. Otherwise, you’re just throwing money away. Better to just pay your shareholders a dividend.

During the binge of buybacks we’ve seen in the past few years, companies have often made that mistake. First, look at the chart below and you’ll see the surge in buybacks. It’s pretty clear that corporate chiefs preferred buybacks to dividends in recent years:

As profits have grown, buybacks have too. Meanwhile, dividend payouts haven’t changed much at all.

Leon Cooperman, an exceptional investor and founder of Omega Advisors, delivered a presentation on Singleton and buybacks at the Value Investing Congress in New York. Cooperman is a real enthusiast of Singleton’s career — a “Singleton junkie,” in his own words. He’s spent a lot of time studying the man and his methods.

Cooperman cited many examples of companies that routinely spend billions buying back their own stock. Unfortunately for those shareholders, the stock prices have subsequently gone down, flushing billions down the proverbial toilet bowl.

The offenders make up a roll call of blue-chip companies: Microsoft, Intel, Lexmark, Masco, Pulte Homes, Circuit City, Chico’s and many more. Countrywide is one of the most egregious recent examples. It spent nearly $2 billion on stock buybacks in the last two years. Countrywide’s stock price has since lost 75% of its value.

James Grant, writing in his newsletter Grant’s Interest Rate Observer, recently wrote about boneheaded buybacks in today’s marketplace. Grant then paid tribute to Singleton when he wrote: “Henry E. Singleton, visionary builder of Teledyne Corp., set establishment tongues wagging by issuing stock at high prices and repurchasing it at low prices. People wondered what he was thinking about. Our postmillennial captains of industry seem not to understand, either.”

But just because most everyone seems to act like they don’t know what they’re doing, it doesn’t mean that there aren’t some companies who get it and wisely buy back stock.

Sincerely,

Chris Mayer
January 31, 2008

P.S.: Looking for companies the buy back shares when they’re cheap is one way to find an investment. But, it should NOT be the only way to find them. My Capital & Crisis readers learn about investment strategies all the time, which leads to consistently large gains. In fact, I just put a report together in which I reveal three of these strategies that are guaranteed to give you 50% gains or else…

Why Henry Singleton’s Buyback Strategy Has Brought in Millions was originally featured in the Penny Sleuth.