Companies that make good capital allocation decisions compound value over time. A great example is Warren Buffett’s Berkshire Hathaway.
Berkshire has only paid a dividend once, in 1967. Since then, it has not paid any dividend to its shareholders, and has reinvested its earnings instead.
From 1965 to 2018, Buffett has expertly grown Berkshire’s book value per share by 18.7% annually . Its share price has mirrored that performance, climbing by 20.5% over the same period – compounded, that’s a gain of 2,472,627%.
It is, therefore, evident that a management team’s ability to make good capital allocation decisions is a key factor in compounding shareholder wealth.
But how can we tell whether a management team can make the right decisions to grow shareholder wealth?