Finding Value in Capital Return

Following momentum is easy. Buying what is out of favor or left behind when markets move higher is harder. That is often where we spend our time as value investors.

We look for companies with strong, durable cash flows where the stock price underestimates the value of owning rights to that cash flow. Sometimes the best use of cash is reinvesting in high-return projects. But when those opportunities are limited, returning capital to shareholders — through dividends and share repurchases — can be the most effective way to create value.

When a company is attractive primarily because it distributes a significant portion of its cash flow, we consider it a capital-return thesis. Dividends put cash in our hands to allocate as we see fit. Repurchases reduce the share count, increasing our ownership of future earnings. We believe a capital-return thesis is most compelling when three elements are present:

1. The combined yield of dividends and repurchases is high
2. The valuation we pay for the stock is low
3. The company’s cash-flow “engine” is healthy and resilient

Throughout 2025, we have been able to purchase several companies where capital return is the core of the investment case — often in areas of the market that have sold off or been left behind.

Allied Irish Banks: surplus capital, steady franchise

Allied Irish Banks (AIB) is Ireland’s largest retail bank in a consolidated market supported by a healthy local economy. Today, it holds more equity than it needs for a conservatively run bank. Its adjusted CET1 ratio — a key regulatory gauge of how much core capital the bank has to absorb losses — is in the high teens versus a mid-teens target.

Management has chosen to return this surplus through a mix of dividends and share repurchases. At the same time, the Irish government has sold down its remaining stake, removing an overhang on the shares.

The appeal is straightforward: a concentrated market, a solid deposit base, a supportive economy and excess capital being returned rather than hoarded. As AIB moves its capital ratio down toward its target, distributions to shareholders can be meaningful.

British American Tobacco: cash today, growing repurchases tomorrow

British American Tobacco (BAT) uses cash from its mature cigarette business to fund reduced-risk products, maintain a large dividend (7% at the time of our purchase in February 2025) and steadily reduce leverage.

In 2024–2025, BAT monetized part of its large stake in Indian tobacco company ITC and used the proceeds to launch a share-repurchase program, with room to increase repurchases as leverage moves toward management’s comfort zone.

The thesis here differs from the AIB thesis. Asset sales and balance-sheet repair set the stage for larger future repurchases, while the high dividend remains supported by free cash flow.

What ties them together

Both companies are being highly selective when pursuing reinvestment opportunities and instead have prioritized returning capital to shareholders. AIB is distributing excess reserves, while BAT is using steady free cash flow and asset sales to fund dividends and repurchases. The path is different, but the outcome is similar: shareholders gain a larger claim on future cash flows.

Capital return is not about giving up on growth — it is about matching cash to its best use. When reinvestment does not clear a high hurdle, paying owners directly can be the most disciplined way to deliver value.

We actively seek out companies that are temporarily overlooked, with strong cash flows, thoughtful capital allocation and attractive entry valuations. When those elements align, the potential for compelling returns does not depend on heroic assumptions about growth. That is one way we aim to compound wealth for clients over time.