2023-10-19 08:30:00 ET
Summary
- Teledyne, under the leadership of Henry Singleton, achieved annual compounded returns of 20% for 55 years.
- TDY used mergers and acquisitions, decentralized control, and an incentive system to increase intrinsic value over 30 years.
- Teledyne's capital allocation strategy included repurchasing shares, acquiring financial firms, and spinning off subsidiaries for high returns.
The following segment was excerpted from this fund letter.
Teledyne ( TDY ) & Henry Singleton: A Capital Allocation Champion
Henry Singleton was a cofounder and CEO of Teledyne from 1960 to 1990. Over that time, Teledyne’s share price compounded by 20% per year. In addition, Teledyne Technologies, the spinoff firm that focused on Teledyne’s core industry of defense and electronics, compounded its share price by 18% per year from 1999 to 2023. This record of almost 55 years of 18-20% annual returns has to be amongst the highest in corporate history.
Henry was an Annapolis- and MIT-trained engineer whose early career was as an engineer and executive for aerospace firms such as Hughes Aircraft and Litton Industries. Henry cofounded Teledyne in 1960, and it went public in 1961, funded by venture capital pioneer Arthur Rock. Henry had some allocation rock stars on his board of directors from the early days of Teledyne, including Claude Shannon, the inventor of information theory, and Arthur Rock.
Teledyne provides an example of a compounder that focused on a long-term trend (the application of integrated circuit electronics and metals to defense) and other high return on capital applications, and used various forms of capital allocation to increase intrinsic value over 30 years.
In its initial years— 1960 through 1968—Teledyne used mergers and acquisitions primarily in the defense, electronics, and metals businesses to grow its intrinsic value. The acquisitions were funded primarily using Teledyne stock. Teledyne purchased these businesses from entrepreneurial families who had built these businesses in the post-WW II boom and wanted an exit. These businesses were in the growth phase of their lives. Most of these entrepreneurs stayed on to run their businesses after being purchased by Teledyne.
Over the same period of time, Henry built a decentralized control structure, a stable of managers, and an incentive system based on returns on capital to optimize the operational performance of the firms acquired. The purchase prices ranged from the mid-single-digit to low-double-digit multiples of earnings (never more the 12x earnings). These businesses also had modest capital requirements, with capital expenditures averaging about 33% of cash flow from operations.
Initially, the pace of acquisitions was modest, as Teledyne was still small. In 1965, Teledyne won a large defense contract which caused the price of Teledyne stock to increase fourfold. With this higher stock price (with forward multiples of 30 to 50x), Teledyne’s acquisitions increased (with a higher stock price used to purchase firms at lower multiples) until 1968, when the growing firms Teledyne liked to buy were selling for too high a price.
During the late 1960s, Teledyne purchased financial firms such as insurance and banking firms. In these acquisitions, Teledyne always received more than they paid in acquisitions. Another example of this approach was when Teledyne approached Berkshire to potentially be acquired. Teledyne wanted Berkshire stock as consideration; but Buffett was unwilling to part with it.
From 1968 to 1975, Teledyne’s forward P/E multiple contracted from 50x to 2x. After Teledyne’s PE declined below 10x, Teledyne repurchased over 60% of its shares via Dutch tender offers. Over the 1970s, operations were improved, and the return on equity increased from 13% to 26%. Initially, the common shares were exchanged for borrowed cash that was quickly paid back from cash flows from Teledyne’s high return on equity businesses that had modest capital requirements.
Subsequent tender offers exchanged debt for cash directly, as the yield on the debt issued was at a substantial discount to the earnings yield of the shares tendered. During the 1970s and early 1980s, minority interests of businesses could be purchased at significant discounts to entire businesses. This provided an opportunity for Teledyne’s insurance companies to purchase minority interests in businesses for their investment portfolios and to earn outsized returns going forward.
As equity prices increased during the 1980s, Teledyne turned to spinoffs (the final chapter of the Teledyne capital allocation story) of its subsidiaries to generate returns. One of the spinoffs, Teledyne Technologies, continued to focus on the application of integrated electronics and has generated returns of 18% annually since the spinoff in 1999.
Teledyne provides an example of a champion capital allocator investing in businesses with long-term tailwinds leading to outstanding returns for shareholders.
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Bonhoeffer Capital - Teledyne: A Capital Allocation Champion