The Value Income portfolio seeks investment opportunities in securities of medium and large public companies which we believe are capable of generating superior economic returns with a controlled level of risk.
We conceive of economic value chiefly in terms of a company’s free cash flow. Companies which produce significant amounts of unencumbered cash have the ability to return value to their shareholders through organically financed investments, by reducing debt, or by distributing excess cash. We pay particular attention to how a company’s management team executes its dividend strategy: we perceive great value in companies that retain some of their cash flow for investments in which the management team is highly confident. We are less attracted to those companies which distribute substantially all of their earnings. Similarly, we perceive little value in firms which use their cash to aggressively re-purchase their own shares.
Winthrop Capital Management attempts to control the level of investment risk through a rigorous comparison of a security’s market price against our estimate of its intrinsic value. Generally speaking, companies which are highly levered are less free to maximize value for their equity investors. Thus those companies with low debt / capital ratios are held in higher regard in our analytic process.
By analyzing a company’s Enterprise Ratio (Enterprise Value / EBITDA), we measure relative value across the firm’s entire capital structure. The Enterprise Value is the theoretical price an acquiring firm would have to pay for the entire business. The Enterprise Ratio, then, expresses a firm’s current market value as a multiple of cash flow. We believe that companies which produce a high level of cash flow relative to the market value of their total invested capital offer attractive risk profiles.
Investing in securities with low market values as compared to WCM’s expectations for their future earnings is another way we attempt to mitigate risk. Finally, we strive to invest in companies with proven management teams—managers which are credible, offer forthright assessments of their business environments, undertake projects which flow logically from their core strengths, and which have demonstrated an ability to develop and execute sound strategies.