Presidential historian Doris Kearns Goodwin spoke at the 2019 Morningstar Investment Conference a couple of months ago. Her topic--which is also the focus of her latest book--was leadership in turbulent times. Specifically, the Pulitzer Prize winner examined leadership as it related to four U.S. presidents: Abraham Lincoln, Theodore Roosevelt, Franklin D. Roosevelt, and Lyndon B. Johnson.
These legends took different paths to reach the pinnacle of political leadership, says Goodwin. Further, their unique approaches fit the historical moment during which they led, just as a key fits a lock. She writes: "While there is neither a master key to leadership nor a common lock of historical circumstance, we can detect a certain family resemblance of leadership traits as we trace the alignment of leadership capacity within its historical context."
Similarly, at Morningstar we'd argue that great corporate leaders can take many different paths to get where they are. But there are a few things that, for us at Morningstar, define great corporate leadership.
We think great corporate managers are those who master their roles as stewards of investor capital. Such leaders make investments and acquisitions supporting the competitive advantages and core businesses of their companies--and they won't pay an arm and a leg to do so. They'll divest underperforming or noncore businesses. They'll find the right balance of investing in the business and returning cash to shareholders via dividends and share repurchases. And they'll assemble a portfolio of attractive operating assets and skilled human capital, and then execute well.
We wrap up this thinking in our Morningstar Stewardship Rating for stocks. Morningstar equity analysts assess companies on items such as: financial leverage, investment strategy, investment timing and valuation, dividend and share buyback policies, execution, compensation, related-party transactions, and accounting practices.
Analysts assign one of three stewardship ratings: Exemplary, Standard, and Poor.
So for today's screen, we wanted to find high-quality, undervalued companies with exceptional management. Specifically, we screened for wide-moat stocks with Exemplary stewardship ratings that were trading in 4- or 5-star range. Sixteen stocks made the cut.
Here's a peek at our stewardship commentary on three of the names from the list.
Amazon.com (AMZN)
"Chairman and CEO Jeff Bezos founded Amazon.com in 1994. We view Amazon's management team as Exemplary in terms of corporate stewardship. Bezos owns about 15% of the shares (and voting rights for 20%), takes no equity compensation or bonus pay, and collects a paltry salary. Although the board is small, it is elected every year, receives no cash compensation, avoids insider relationships, and hasn't implemented antitakeover provisions. The company also provides a fair amount of supplementary financial data in its financial reports. Our only complaint is that specific disclosures have not increased as the company has expanded into new areas, including digital downloads, the Kindle suite of products, and user/Prime membership data (though to its credit, management broke out Amazon Web Services as a separate business unit in the first quarter of 2015 and disclosed that the company surpassed 100 million Prime memberships globally in 2017).
"Amazon has made several investments in sustaining its moatworthy business models, including an efficient fulfillment infrastructure in North America, a vast portfolio of audio and video content, and AWS capacity. However, charges tied to the Fire Phone in 2014 and operating losses internationally underscore the importance of Amazon being selective with its capital-allocation decisions. We believe the lack of consumer interest in the Fire Phone was a wake-up call for management's future capital decisions, as the company runs the risk of losing key personnel without stronger returns on invested capital, owing to the equity component of many employees' compensation structure. However, we're comfortable with this risk, based on recent capital discipline and investments that have been more directly aligned with the core commerce marketplace and AWS platforms."
--R.J. Hottovy, equity strategist
Charles Schwab (SCHW)
"Our stewardship rating for Charles Schwab is Exemplary. The company is led by president and CEO Walter Bettinger and chairman Charles Schwab. Chairman Schwab is the company's founder, while Bettinger has been at the helm since 2008. Previously, Bettinger was COO of Charles Schwab and founded a retirement plan services company that he sold to Charles Schwab. We think Bettinger possesses the skills and experience needed to run the company.
"Schwab has consistently been an industry trendsetter by innovating and disrupting the status quo or by being a fast follower and propagating a formerly niche product or idea. Over the past several years, the company has been an early mover into asset-based fee products, expanding its bank, exchange-traded funds, digital advice, and physical franchise presence. In terms of capital allocation, we had seen the slow growth of the company's dividend as prudent, because the strategic retention of capital should translate into accelerated economic return growth at the company's bank. We also agree with the company recently increasing its dividend and share repurchase program, now that the hyper-growth phase of the bank from the movement of money market fund balances is done. Generally, we think management has successfully transformed the company into a modern investment services firm from a discount brokerage during a period of substantial industry structure changes."
--Michael Wong, sector director
Dominion Energy (D)
"We assign management an Exemplary stewardship rating, owing in large part to its solid record of creating long-term shareholder value while reducing risk. Since 2010, the company has focused on the development of new wide-moat projects with conservative strategies, exited the exploration and production business, sold or retired no-moat merchant energy plants, and made significant investments in moaty utilities infrastructure.
"Dominion's management team has done a good job of capital allocation, moving quickly into areas with attractive returns on investment. Virginia legislators wanted more in-state fossil and renewable power generation, passing legislation and encouraging regulators to allow rate rider mechanisms that provided incentive returns on equity for new generation projects. Dominion responded by proposing several large power plant projects and to date has achieved returns well above the industry average on these investments. We believe management deserves credit for its skillful handling of the regulatory process and believe its excellent regulatory relationships in Virginia will be expanded to its state-regulated utilities operations in South Carolina and Utah.
"In addition, Dominion's gas transmission system is the perfect location to provide transmission and gas gathering services for shale gas producers in the Marcellus and Utica gas plays. Although the location can mostly be attributed to good luck, management has responded by quickly allocating capital to modify Cove Point to an LNG export facility and build new transmission pipelines. These projects are expected to provide returns well above Dominion's cost of capital.
"Finally, we believe management's attention to environmental, social, and governance risks is good stewardship of shareholder capital and supports dividend security."
--Charles Fishman, analyst
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