Management quality is crucial to the performance of a company. Bad management can quickly ruin a business and your investment.
As a dividend investor, you need to make sure the companies you own are being run by strong management teams. These are your hard-earned dollars we’re talking about here!
So how do you quantify solid management?
Unfortunately, management competence is not as easy to measure. Thankfully, there are some things to look for which signal a good management team. Here they are...
How did earnings hold up in tough times such as the recent recessions that occurred in 1980, 2001 and 2008? Did earnings drop, hold steady or increase?
If earnings weren’t severely impacted, that signals a management team that successfully navigated the company through the storm. If they have done a good job in the past then they will likely do so in the future too!
A strong balance sheet with low debt signals good management. Consistent growth without relying on debt takes prudent management!
Also, take a look at how the company’s debt levels held up in past recessions. Like earnings, debt levels should not have been drastically affected. There should be plenty of cash on hand to ride out any storm.
Has the management team successfully acquired companies in the past? Integrating a new company into the corporate culture is a tremendous challenge but can add a lot of value for shareholders if done successfully.
If a bad acquisition is made, it could be a drag on earnings and the balance sheet for a long time to come. So have a look at past acquisitions and how the company performed in the years following the purchase. If they made smart acquisitions in the past, there’s a good chance they will continue to do so.
And last but not least...
How long has the company consecutively paid out and increased dividends to shareholders? In past recessions, the dividend should not have been cut and should still have been increased.
We are looking for companies that have paid out and increased dividends every year for at least 20 years. A company that has achieved this has managed to keep the dividends going through multiple recessions. That is another great sign of a solid management team my friends. Recession or not, we want our dividend payment!
Ok good job... you know how to investigate management quality. Let’s keep trucking...
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