Dedicated allocators of capital

VT Tyndall Global Select Fund

Dedicated allocators of capital

One of the key measures of management quality is their record in allocating capital wisely to create value for shareholders. For management teams this involves balancing the internal rate of return from investing in the firm, whether it be in the form of capital expenditure, R&D, or inorganic expansion, with that of buying back stock or returning cash to shareholders in dividend form.

During the pandemic, as companies looked to save capital, many management teams turned off the taps for internal investment, stopped buyback programs and forwent their dividend. In Europe, over 40% of companies decided to cut or cancel their dividends in order to preserve capital. Despite almost 80% of companies talking about raising their dividends in the recent reporting season, the overall dividend distribution is likely to be lower than that in 2019 in most sectors.

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Ironically as the market approaches new all-time highs, management teams have become more inclined to reinstate or start new buyback programs. Buybacks are more prolific in the US than Europe as management teams cite the tax benefits for investors of returning capital through buybacks than doing so in dividend form. This ignores the problem that the best time to buyback stock would be at times when the company’s share price is depressed and too many management teams fall into the trap of buying back shares at or above fair value.

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Not all management teams fall into this trap, within our VT Tyndall Global Select Fund, we believe that Fiserv provides a good example of how to increase the rate of stock repurchases when an unjustified correction in the share price occurs.

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Away from those teams that are now reinstating dividends, there are a select band of management teams, that had the foresight to look through the pandemic, not only investing in the long-term growth of the business but maintaining or even increasing their dividends over the past year; the ability to do this was made easier by the reliable and stable cash flows that their underlying companies generate. While reliability of dividend is not necessarily an indicator of strong and reliable free cash flow, it is a decent starting point for screening for companies that have this trait and have business models that have adapted to and invested through multiple business cycles. As the value of a company is the present value of future cash flow, we believe that high and sustainable free cash flow throughout the cycle in one of the key characteristics to look for when investing. Below we show a (not exhaustive) selection of companies within the VT Tyndall Global Select Fund that have both reliable cash flows and long histories of paying dividends.

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21st May 2021
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This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
Not for retail distribution – this document is intended for professional clients only
Disclaimer

WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not