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Strategies & Market Trends : Free Cash Flow as Value Criterion
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To: Reginald Middleton who wrote (61)10/30/1997 8:19:00 PM
From: Andrew  Read Replies (1) of 253
 
Reginald, thanks for the Value Line info...I'll check it out.

However, I must vigorously disagree with your dim view of stock buybacks. If they have cash above and beyond all well-planned capital investments required for optimum growth in their existing business, it is entirely appropriate to use existing cash to increase shareholder value in other ways. They could make aquistions, pay higher dividends or buyback shares. I think buying back shares points out to the astute investor that the company views its stock as undervalued relative to expected future growth. At the same time it accelerates per share growth by concentrating (vs. diluting) it ownership. This is a more tax-efficient method of rewarding long-term shareholders than dividends. Buying back expensive stock, of course, does not have these benefits.

Your thesis assumes that either a) no company has free cash flow at all, or b) the only productive use of free cash flow is through aquisitions. Sensibly-priced aquistions large enough to consume the free cash flow of IBM are not exactly growing on trees. And if one can be found, they are often difficult to manage cost effectively. Conglomeration is not the only answer!

I will read sometime this week that thread you started where you probably provide analysis supporting your thesis.

Regards,

Andrew
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