Nick Train has used Elon Musk’s soaring wealth to explain why companies should be cautious about returning to old norms when it comes to capital allocation decisions.
In mid July, Musk’s net worth has hit $70.5bn, almost triple what is was in March, according to Forbes. The Tesla founder has surpassed investor Warren Buffett.
“Not everyone can be Elon Musk, but the sight of his net worth advancing ahead of Buffett’s is inspiring and informative. We live in a time when innovation is creating great value for society. The rewards to an innovator are and should be far higher than those to a rentier.”
Train’s comments in the latest Lindsell Train Investment Trust monthly factsheet had been adapted from his feedback for an investment banker seeking advice for companies ahead of results season.
Although he was most critical of equity issuance, Train also described the spate of dividend cuts in the year to date as an opportunity to reset so companies could invest in technological innovation.
He said: “Although a truism, we’d say corporate survival is the absolute priority and if that requires equity issuance, so be it. Nonetheless, equity is precious and should not be diluted lightly.
“However, if there is no existential threat, then dividend holidays are far preferable to us than equity issuance at low prices and on dilutive terms. Dividends can be restored when prudent to do so, but the effects of dilutive share issuance are long term and far harder to remedy.”
He added that dividends should be restored to levels that “make objective sense for the company at that point – not with reference to some historic level of pay-out”.
“Probably some companies have been over-distributing, particularly in the UK. Here is an opportunity for a reset. Investors will reward boards which behave rationally as regards dividends, particularly if the newly retained earnings accelerate growth.”
He urged such companies to invest in digital strategies.
“Investors will back any credible strategy that makes a company more relevant for the 21st century and that means more digital products and services.
“With government bond yields below 1%, or effectively on a P/E of 100x, the implied value of a sound company, offering protection against long term inflation and with a credible growth strategy is very high indeed.”
