It’s not unusual for a company’s stock price to soar — or sink — on news of a CEO shakeup. When Mary Dillon, revered on Wall Street for her eight-year run at Ulta Beauty (ULTA), was named to the top job at Foot Locker (FL) last year, the shoe retailer’s stock jumped 20% in a single session. Dillon’s track record of turning Ulta around is why the Club started a position in Foot Locker back in March. We hope she can work her magic again. The reaction to Dillon’s appointment highlights a CEO’s outsized influence over a company’s direction — and perception by the market. In fact, up to 45% of a company’s performance is tied to a CEO’s influence, according to estimates from McKinsey & Co. So, CEOs matter when picking stocks — and at the Club, these are the five things we look for when evaluating the leaders of our holdings. 1. Capital allocation An important question to consider early on when evaluating a CEO is their track record of spending the company’s money. Have they done so wisely, in a way that over time has created value for shareholders? Or is there evidence of poor capital allocation decisions, that have produced unsatisfactory results for investors? Assessing the quality of those decisions requires determining whether a CEO has overseen smart and beneficial acquisitions over the years, in addition to making appropriate internal investments that power organic growth. Investors also must evaluate a company’s approach to dividend payouts and stock buybacks, two ways management teams can return excess profits back to shareholders. Well-run, mature businesses should generate enough cash to support steady increases to their dividend payments, which bolster total return on investment, and continued share repurchases, boosting shareholders’ ownership percentage. Buybacks can also be an opportunistic way for a management team to reduce its share count at favorable valuations. Each of these capital allocation strategies carries benefits and shortcomings — and are, at times, in competition. For example, cash spent on an acquisition or new project could also be used to pay down debt or buy back stock. It’s on management teams, led by the CEO, to choose a mix for their enterprise that maximizes shareholder value. J im Cramer has long been a proponent of buybacks and dividends (or both) in picking stocks. Most of the stocks in the portfolio offer at least one of them. The recent shift in capital allocation decisions seen from many oil-and-gas companies, including Club holding Pioneer Natural Resources (CTRA), highlights that dynamic. Gone are the days when these exploration-and-production (E & P) firms invested heavily in expanding drilling capacity. Instead, publicly traded E & P companies are allocating a larger share of profits toward stock buybacks and dividends. In the four years prior to the Covid pandemic, Pioneer’s capital expenditures of $11.76 billion exceeded its net operating cash flow of $9.95 billion. In 2021 and 2022, by…
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