“The problem is that many CEOs, while almost universally well intentioned, don’t know how to allocate capital effectively.” —Mauboussin & Callahan, Capital Allocation – Updated Evidence, Analytical Methods, and Assessment Guidance
Thanks a lot to a reader of the blog for sending me the link to this new paper!
Another great read (dated June 2, 2015) is out from Mauboussin and Callahan, both currently at Credit Suisse.
Below en excerpt from the frontpage of the paper describing the content.
• Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share.
•Capital allocation is always important but is especially pertinent today because return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.
• Internal financing represented more than 90 percent of the source of total capital for U.S. companies from 1980-2014.
• M&A, capital expenditures, and R&D are the largest uses of capital for operations, and companies now spend more on buybacks than dividends.
• This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook.
• We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation.
Click image to download PDF. Also, the Mauboussin link post will be updated to include this one to.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.