Article Reviews, Value Investing

Interview by Donald Yacktman with Gurufocus

I recently came across this interview by famous value investor Donald Yacktman with Gurufocus here. Just wanted to note down some learnings from the interview.

Company Analysis Process

  • Look at the cash flows of a company. Two components
    • Payout through dividends and net share repurchases
    • Return on retained earnings (this is the wildcard)
    • What a company does with its cash in the past is a much better predictor of what they’re going to do in the future than what they say.
  • Really understand the business model — most of the time the good businesses will make the managers look like stars, rather than the other way around.

What is Considered a High Quality Company

  • High Return-On-Asset
  • Low capital intensity and low cyclicality (e.g. Coke, P&G)
    • Low capital intensity + Low cyclicality: Consumer Staples
    • Low capital intensity + High cyclicality: Media
    • High capital intensity + Low cyclicality: Utilities
    • High capital intensity + High cyclicality: Capital Goods (e.g. machinery)
  • Predictable
  • Fairly stable operating results in good and challenging economic environments
  • Company sells a disposable product or a recurring service
  • Large market share
  • Prefer companies that grow faster than the S&P and can pay out 80-90% of their earnings
  • Annual high single digit or low double-digit forward rate of return
    • Forward rate of return = Free cash flow yield + real growth rate + inflation rate
    • Free cash flow yield = Normalized earnings * (1 – % reinvested in the business) / price of business

Other References



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