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Henry Singleton: A Capital Allocation Masterclass in Three Acts
"I do not define my job in any rigid terms, but in terms of having the freedom to do what seems to me to be in the best interests of the company at any time."
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In John Train’s The Money Masters (1980), Warren Buffett lavished particular praise on one man: Henry Singleton.
According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutter.
When Buffett talks — especially in such glowing terms — I listen. Ever since reading that passage, I’ve tried to learn everything that I can about the legendary CEO of Teledyne.
Singleton was a renaissance man of sorts. He attended the U.S. Naval Academy, earned his Ph.D in electrical engineering from MIT, served with the Office of Strategic Services (the proto-CIA) during World War II, and later founded Teledyne in 1960. Not to mention that he played chess blindfolded and could read a book a day.
Under Singleton’s watchful eye, Teledyne blossomed from a small semiconductor maker into one of the most valuable conglomerates in the world. He was, without a doubt, one of the most exemplary entrepreneurs of his era. Of any era, really.
How did he do it?
With an open mind and an even keel — rather than a brazen display of intelligence. Obviously, Singleton was bright. Prodigiously so. But Teledyne’s success mostly boiled down to its founder’s willingness — perhaps even eagerness — to go against the crowd and fluidly shift from one capital allocation strategy to the next.
A contrarian approach sounds nice on paper, but rarely survives a person’s first brush with the withering criticism and mockery that goes along with it. As it turns out, taking the road less traveled is not terribly popular with the conforming majority. Many prefer to be a “normal” member of the thundering herd rather than breaking off on one’s own in search of superior results.
That was never a problem for Henry Singleton.
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Act I: Acquisitions
In the early 1960s, Teledyne’s involvement in the burgeoning semiconductor and aerospace industry made it “innovative” and “disruptive”. And, as we’ve seen in recent years, such a reputation can be jet fuel for a company’s stock price.
A lesser man might have bought into the hype. As Teledyne’s price soared, Henry Singleton so easily could have believed that this was such a transcendent company — and he such a visionary leader — that the gravitational pull of valuation no longer applied to this rocket ship. Buckle up and ride to the moon.
But not Singleton.
He correctly identified that Teledyne’s stock price — trading at 60x earnings — had gotten way out over its skis and was significantly overvalued. Rather than waiting for Mr. Market to correct course, Singleton instead took his overheated stock and used it to acquire other companies. And he did that over and over and over again.
By the end of his shopping spree, Singleton had stocked Teledyne with 125-145 new subsidiaries — from offshore drilling to insurance to electronics to auto parts to high-fidelity speakers — that would fuel growth and cash flow for the rest of his career. (He even bought Water-Pik!)
In a sense, Singleton built a corporate empire piece by piece for pennies on the dollar.
Each Teledyne subsidiary was tasked with becoming a profit, margin, and cash flow machine. “We create an attitude toward having high margins,” explained president George Roberts. “In our system, a company can grow rapidly and its manager be rewarded richly for that growth if he has high margins.”
“If he has low margins, it’s hard to get capital from Henry and me. So our people look and understand. Having high margins gets to be the thing to do. No one likes to have trouble getting new money.”
In short order, Teledyne went from a firm of negligible size to the Fortune 500.
Act II: Buybacks
Alas, Teledyne could not remain the belle of the ball forever.
Conglomerates fell out of favor in the late 1960s and the wider market turned bearish in the early 1970s. Those two factors, along with Teledyne’s steadfast refusal to pay a cash dividend, combined to send the company’s stock price crashing.
With Teledyne no longer so expensive — and, in fact, well on its way to being undervalued — Henry Singleton realized that his former strategy would no longer work.
“In 1968, I had lunch with him and he told me the acquisition game for Teledyne is over,” Leon Cooperman recently told Forbes. “It makes no sense to take undervalued public market stock and pay a private market value to buy businesses.”
Singleton plotted his next move and, by 1972, re-emerged with an entirely new playbook. After a decade of issuing stock and growing the size of his company, he abruptly threw the whole operation into reverse. With Teledyne’s earnings multiple now languishing in the mid-single digits, Singleton began to repurchase shares hand over fist.
He later told Forbes:
In October 1972, we tendered for one million shares and 8.9 million came in. We took them all at $20 and figured that was a fluke and that we couldn’t do it again. But, instead of going up, our stock went down. So we kept tendering, first at $14 and then doing two bonds-for-stock swaps. Every time one tender was over, the stock would go down and we’d tender again and we’d get a new deluge.
Teledyne stock even dipped below $8 at one point — which only emboldened Singleton further. Between October 1972 and February 1976, Teledyne’s shares outstanding dropped from 32 million to 11.4 million. That’s a 64% drop.
And, by 1984, Singleton had retired approximately 90% of the company’s stock. All at prices far below intrinsic value. Here was the rare example of a CEO using buybacks to snatch up seriously undervalued shares in an uber-efficient manner.
Forbes put it perfectly: “Dilution? Singleton virtually dehydrated Teledyne’s capital structure. Growing the business while shrinking its capital. Quite a trick.”
Eventually, as earnings per share skyrocketed, Wall Street came around to Singleton’s bravura gambit. By 1978, Teledyne stock was back up over $100 — meaning that several of Singleton’s tenders had turned into ten-baggers.
Act III: Common Stock
At the same time that Henry Singleton was aggressively buying up his own stock, he noticed that plenty of other companies had gotten similarly beaten down by Mr. Market. So the Teledyne CEO took his first hesitant steps into the investment game.
Who am I kidding? Singleton never did anything hesitantly. When he spotted an opportunity, he jumped in with both feet.
According to Forbes:
[Singleton] was thrust into the role of portfolio manager quite by accident. It might never have happened, he says, if Teledyne’s Argonaut Insurance subsidiary had not got into serious trouble writing medical malpractice insurance in 1974. Singleton converted all his insurance portfolios into liquid cash to be ready for a disaster. The disaster never came. The job of reinvesting faced him and he decided to be innovative and daring in his approach there, too.
He pounced on undervalued companies that operated in fields he knew well. Like conglomerates and offshore drillers and insurance outfits. Of particular note, Singleton spent $130 million to buy 27% of Litton Industries.
While other investors were panicking and running for the exits in the mid-1970s, Singleton was a happy buyer of common stock. Just like he was for all of his former shareholders during Teledyne’s many tender offers. If someone wanted out, Singleton was only too happy to oblige.
By the early 1980s, the company’s investment portfolio had ballooned to nearly $3 billion. It was at about this time that Business Week published a highly-critical story on Teledyne that took particular issue with Singleton’s foray into the stock market. (The U.S. was mired in a severe recession and some of his stock picks were well underwater.)
Teledyne’s share price had also recently fallen from $175 to $120, which the magazine believed to be a symptom of Singleton wringing every last cent out of his subsidiaries to put towards tender offers and common stock purchases.
Singleton, the consummate contrarian, couldn’t care less about the bad press. His friend Leon Cooperman, though, fired off a lengthy rebuttal to the Business Week editors.
Cooperman, who has fire where Singleton had ice, wanted the magazine to know that, during the acquisitive 1960s, Teledyne’s sales and net income had climbed to about $1.3 billion and $58.1 million, respectively, from “essentially zero”, and that during the non-acquisitive 1970s, profit growth had actually accelerated (with net income of the 100%-owned operating businesses rising sixfold).
In any event, Business Week’s article hit newsstands at exactly the wrong time. Whatever merit the case against Singleton might have had, it all went up in smoke when — just a few months later — the stock market awakened from its slumber and roared back to life. Recession over. Singleton vindicated.
He eventually retired as CEO in 1986, but remained chairman of the Teledyne board of directors until 1991. During his career, Singleton created a mind-boggling amount of wealth for his shareholders — at least for those that stuck around. According to Distant Force, an exhaustive memoir of Singleton’s career, Teledyne stock achieved an 18% compounded annual return between 1966 and 1991.
Most importantly, Henry Singleton’s path is one that any of us can walk. He made smart, logical decisions at every turn — never losing sight of the importance of valuation — and refused to adhere to any particular investing orthodoxy.
“Just buy very good value,” Singleton said in 1979. “And, when the market is ready, that value will be recognized.”