Login | October 06, 2026
Capital allocation explained
Motley Fool
Published: October 6, 2026
Q. What's a company's "capital allocation"? -- D.B., Omaha, Nebraska
A. It's how the company spends its money. Management may decide to spend its capital to hire more employees, build more factories, pay down its debt, pay its shareholders a dividend (or increase the dividend), buy back some of its shares, buy another company, invest and/or save for a future opportunity.
When management decides how to allocate capital, it should pursue the most productive plans to grow larger, financially stronger and more valuable. Ideally, therefore, it shouldn't overspend on an acquisition or buy back shares when they're overvalued. Shareholders can lose out when a company's capital is not allocated effectively.
Q. I saw that Verizon Communications was removed from the Dow. Is it in trouble? -- R.P., Everett, Washington
A. Nope. The Dow Jones Industrial Average is an index of 30 companies meant to collectively reflect our overall economy. Every few years or so, one or more companies get ejected to make room for new additions. The businesses removed are not necessarily in any trouble -- it's just that the ones being added are deemed more appropriate.
Verizon was removed in June, replaced by Google parent Alphabet. Verizon has been performing well enough, but Alphabet is bigger, growing faster and investing heavily in artificial intelligence (among other things). AT&T, another telecom giant, was booted from the Dow in 2015 and replaced by Apple.
Interestingly, General Electric, one of the original 12 companies in the Dow when it began in 1896, was removed from the index in mid-2018 and replaced by Walgreens. Less than six years later, Walgreens, which had become Walgreens Boots Alliance, was itself removed -- and replaced by Amazon.com
Fool's School
Learning from Seth Klarman
Seth Klarman is a respected investor and CEO of the hedge fund The Baupost Group. His 1991 book "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor" is long out of print and considered a cult classic. These quotations attributed to him can help us invest more successfully.
-- "There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple."
-- "Buying such bargains confers on the investor a margin of safety," says Klarman, defining it as "room for imprecision, error, bad luck, or the vicissitudes of economic and business forces."
-- "Few are willing and able to devote sufÞcient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed." Becoming a successful value investor does take time and skill. If you're not up for that, remember that you can do quite well over the long run with one or more simple low-fee index funds.
-- "Every security or asset is a 'buy' at one price, a 'hold' at a higher price, and a 'sell' at some still higher price." This is a good reminder that great stocks can be overvalued and that you should aim to buy great stocks at great, or at least good, prices.
-- "You have to be able to stand things going bad before they go good." Every stock investor should expect occasional downturns and disappointments. Patience and some risk tolerance are necessary.
-- "[People] invest without much attention to risk, because risk is unpleasant to contemplate and difÞcult to measure." Even wonderful businesses face risks that careful investors should consider before buying.
-- "If someone asked me to invest their money with the goal of turning a quick proÞt over the next six to twelve months, IÕd have no idea how." Wealth grows most reliably over long periods.
My Smartest Investment
Cruising to Profits
My smartest investment? Well, my wife and I were longtime cruise enthusiasts. We have a retirement fund managed by our trusted broker, but I had some extra cash and started thinking about investing some money myself. I got a lot of ideas from your weekly column in the Sunday paper. As we were familiar with cruise ships, I was drawn to Royal Caribbean Cruises and Carnival. Both were shut down when the COVID-19 pandemic began, and their stocks were depressed. From reading their financial statements, I could see that Carnival had significant debt and Caribbean seemed financially healthier. Common sense said that with vaccines arriving, both stocks would likely rebound. I bought mostly Royal Caribbean shares for around $70 apiece and some Carnival shares at $17. Needless to say, they have rebounded well -- especially Royal Caribbean. I gained 88% in 2023, 53% in 2024, 20% in 2025 and 11% so far this year. -- F.G., Ashland, Ohio
The Fool responds: You did very well! We hope you didn't invest only in cruise companies, though, because it's risky to put all your eggs in one basket. Even today, cruise companies face challenges such as geopolitical conflicts and the threat of other pandemics. Remember, too, that not every year will deliver gains.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Foolish Trivia
Name That Company
I trace my roots back to 1979, when I was founded in a basement and had three half-time employees. Today, relatively few people know my name, but my software serves a wide swath of the healthcare industry. More than 325 million patients have a current electronic record in my database -- which is used by more than 3,400 hospitals. Based in Wisconsin, I'm employee-owned and not publicly traded, and I've grown organically over the years rather than through acquisitions. My founder still runs me, and she's a billionaire now, planning to give away her fortune. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1929, when two circus performers who'd lost their jobs at the outset of the Great Depression started collecting old rags discarded by factories, washing them and selling them back. By 1938, I was called Acme Wiper and Industrial Laundry. (I have a different name now.) I expanded into uniform rentals in 1959, which nearly doubled my revenue. My catalog debuted in 1991. In 2001, I was added to the S&P 500 index. I serve over 1 million businesses, employ around 48,000 people and rake in around $11 billion annually. Who am I? (Answer: Cintas)
The Motley Fool Take
Considering Clorox
Clorox (NYSE: CLX) has struggled in recent years, but the worst of its troubles could be in the rearview mirror, leaving it a promising high-yield dividend stock. (Its yield was recently 4.7%.)
Clorox completed its acquisition of Gojo Industries in April, adding the Purell brand to its health and hygiene portfolio, which accounts for more than half of Clorox's total net sales and remains the key driver of its overall sales growth.
Fiscal 2027 (which began July 1) will mark the first full year in which Clorox will report after its $580 million enterprise resource planning (ERP) overhaul, which took longer and cost more than expected. But it should make the overall business more efficient, integrating financial, supply chain and sales functions under a new cloud-based system.
Clorox has worked on improving its profit margins and efficiency, but it remains in a highly challenging operating environment. Still, it's positioned to grow over the long run. And its stock is attractively priced, with a recent forward-looking price-to-earnings (P/E) ratio of 18, well below its five-year average of 23. That's a dirt-cheap valuation for a company with industry-leading brands spanning multiple product categories -- such as Brita, Burt's Bees, Clorox, Fresh Step, Glad, Hidden Valley, Kingsford, Liquid-Plumr and Pine-Sol.
Clorox may lack the glitz and glam of a high-octane growth stock, but it's precisely the kind of deep value stock that long-term income investors look for.
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