Don't kill the golden goose: how a disciplined approach pays long-term dividends

“We’re looking for businesses that have some kind of competitive advantage. That could be a structural advantage in the industry, a low-cost position, or maybe a patent,” Arpin says. “That’s going to reinforce the stability of their free cash flow, and also may drive its potential growth over time.”

While owning a high-quality franchise is table stakes for the managers at Beutel Goodman, they also take great pains to avoid overpaying for a business. Two decades after the 2000 dot-com bubble, countless investors once again rushed into the world of frenzied speculation. Enabled by a flood of cheap money into the financial markets, many were exposed to substantial capital losses after paying extreme multiples for businesses they perceived to have long runways of growth.

Beutel Goodman’s portfolio managers take that kind of emotion out of their investing by adhering to a very disciplined buy-sell process. First, they scrutinize market multiples, as well as any available information on precedent transactions, and buy companies that are trading at a discount to their estimated intrinsic value. Second, once a portfolio holding reaches their target price, they will sell a third of that position, then reassess from there whether they want to hold it for longer or redeem more.

“In building our portfolio, we’re looking for companies that have a return potential of 50% total return, inclusive of dividends, over three years,” Arpin says. “By focusing on businesses that are sustainable free cash flow generators, we’re able to build a high-quality portfolio that, over time, should provide risk mitigation and capital protection.”

Finding strength in sustainability

For companies with strong free cash flow, a return-of-equity strategy isn’t always the best play. Depending on where they are in their life cycle, they may be better off reinvesting the cash into their business, or seizing attractive opportunities to make acquisitions. Stock buybacks could also open the door to diluting future returns, especially if a company is already highly profitable with a relatively expensive share price.

Leave a Reply

Your email address will not be published. Required fields are marked *