56. Capital allocation is just as much about anticipating and influencing the sequence of events as it is about allocating capital. What’s optimal in one scenario isn’t in another. There’s more to it than choosing between dividends and stock buybacks.
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57. It’s easy to conform your capital allocation decisions to the opportunities presented to you. It’s harder to make the opportunities presented to you conform to your ideal capital allocation policy. But it is possible. Companies that learn how can create fortunes.
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58. Elaborating on earlier, consider Teledyne. Earnings fell in half from 1973 to 1974 because of problems at one of its subsidiaries, Argonaut, related to medical malpractice insurance. Stock took a beating, and the co. took the opportunity to tender for huge chunks of shares.
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59. According to a presentation by Leon Cooperman, Teledyne engaged in three separate tender offers from 1974 through 1975, repurchasing from between ~10% and ~20% of its outstanding shares in each of them Amazing, considering Teledyne’s troubles at the time.
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60. But just how bad off was Teledyne? Although Argonaut shored up its malpractice reserves, some of the company’s losses in 1974 came from its investment portfolio. There was more to the story than poor underwriting results, the seriousness of which MAY have been embellished.pic.twitter.com/QfUhWkGzSY
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61. For example, when talking to Congress about its NY biz, the CEO of Argonaut admitted that of $69 million of malpractice reserves, Argonaut had only paid out about $24k on its policies. An analysis by an outside firm estimated Argonaut was actually about 2.6x overreserved.pic.twitter.com/wNZBk6O451
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62. Funny thing about increasing your loss reserves as an insurer. Doing so lowers reported earnings, and can make a business look less profitable than it actually is. Maybe it’s a coincidence that so many of Teledyne’s massive tender offers happened around this time.pic.twitter.com/gN0jrVBHhT
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63. Or maybe it wasn’t a coincidence, and Singleton knew what he was doing. At the same time Teledyne was reporting losses from its insurance businesses, its other businesses continued to grow. But it was able to buy in shares at a discount to what it paid a few years earlier.
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64. After insurance results turned in ‘75, the stock soared and became a multibagger from the tender offer prices. With the Argonaut losses, Teledyne had time to do big tenders at low prices. That’s why sequencing and narrative management are important to capital allocation.
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