What’s a shareholder friendly company?

A business that is shareholder friendly always operates with the shareholder’s best interests at heart. They tend to be lead by competent managers who communicate openly and routinely reward investors. Businesses that exhibit these three traits are more likely to have favorable long term investment returns than their counterparts.  Let us examine these traits in further detail…

Competent Management

The number one trait that shareholder friendly companies have is a team of great managers running the business.  Determining whether or not management is competent can be a subjective process.  After all, there are no hard numbers you can crunch to figure this out.  Instead you have to look at other more subtle details like experience level and motivation.

Your initial step should be to research the company’s top executives.  These are the folks leading the business and making all the major decisions.  Are any of these individuals original founders of the company ?  Have they been at the firm for 20 or 30 years?  If so, then you probably have a group of managers who are knowledgeable and dedicated to the company. If the CEO or Chairman is new to the firm then do they at least have years of industry experience?  There’s nothing worse than a CEO who doesn’t understand his own operating environment.

Once you check out the experience level of the management, you need to ensure their motivations are aligned with yours. Does the company have a high level of insider ownership?  If so, you can be sure that those running the business want the stock to go up just as much as you do.  Another thing to check out is the level of insider buying vs selling.  Nothing inspires confidence more than when the CEO is buying shares on the open market.  Conversely, if top management is dumping share after share one must question the company’s future prospects.

Open Communication

Your next step on your quest to find shareholder friendly companies is to look at how management communicates with investors. Shareholder friendly businesses go out of their way to be open and honest with investors.  Listen to the latest quarterly conference call. Does management discuss bad news as openly as good news?  Or do they try and dodge the tough questions when they’re asked?  Is there any vagueness or attempt to hide important facts?  If that’s the case, please recognize that Bernie Madoff and Ken Lay were the same way.

Rewards Shareholders

The last step in the process is checking to see if the company uses its cash to reward investors.  This can be done either by paying dividends or buying back shares.  Check out the company’s dividend history.  Do they have a long history of paying dividends?  If they pay a dividend, do they routinely increase the amount?  The answer to these questions tell a lot about management’s feelings toward sharing the wealth.

In addition to checking the dividends, explore whether or not the company has a stock repurchase plan.  You can find this information in the 10K and 10Q filings.  If there is a repurchase plan, check here to see if the plan is actually decreasing the number of shares outstanding. Sometimes repurchase plans are enacted to offset share dilution caused by overly generous stock compensation plans.  If outstanding shares are decreasing year after year it’s a great sign that management is committed to increasing the stock’s price.

As you can see, determining if a company is shareholder friendly can be an involved process.  However, if you use this guide and answer the questions I’ve pointed out, you’ll be able to rest easy knowing your money is invested in rewarding enterprise.  If you enjoyed todays post, please stay tuned to for my next post in the Researching Stocks series which should be out shortly.