Henry Singleton: The Man Who Pioneered Share Buybacks - Commoncog Case Library

The contrarian conglomerate king who pioneered the use of share buybacks.

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This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/henry-singleton-conglomerate

I’ve learnt something remarkably interesting, from an email from @solohbet.

Many decades ago (around 1976), I wrote a term paper during my MBA pursuit on financial ratio analysis, which I’ve long lost a copy of. Nevertheless, Teledyne measured their divisions’ performance using an ingenious formula using 24-month moving averages, which largely prevent year-end manipulation and easing off the gas by executives who have made their bogies and saving good news for next year. The second piece, and in the same vein to prevent games, credited only half of reported income before taxes (EBT) plus half of cash flow. It looked something like this:

(1/2 of EBT + 1/2 of Cash Flow)/ Stockholder’s Equity, each element being the 24 mo. moving average. It might have made a great Xmrit chart.

Bruce can’t find the source for this, but he’s sure on the details of the formula, and so I’m including it here in the comments (at least until I can find a public source). This is fascinating — and it ties in with the Incentive Design piece that you’ll notice pops up again and again when it comes to conglomerates.

Bruce did find this link — but it doesn’t talk about the 24 month MA.

The Teledyne return was an average of net cash flow and profit. The book gives the following example:

  • Reported profit: $1,000,000
  • Reported cash flow: $500,000
  • Teledyne return: $750,000 = ($1,000,000 + $500,000)/2

The company’s thinking was this: Your profit was $1,000,000, but you received only $500,000 in cash. We’ll credit you fully for profits booked and received as cash. We’ll give you credit for some of the profit booked but not yet collected.

This single metric forced company presidents to focus on profit and cash flow simultaneously. It also allowed Teledyne corporate to standardize its comparison of operating company results.

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I’m a little annoyed at myself for this — @solohbet gave me a link to https://www.hvst.com/posts/dr-henry-singleton-and-teledyne-wm4T112d which I think beats Commoncog’s case on Singleton in some ways.

I’ll see if there’s some way to quote or integrate this other piece into the case.