re:>>Unless a stock buy back action is aimed at fuding a compensation plan, it should be considered a stern warning about MGMT's outlook for future growth. <<
Reginald, I like your posts and you are again right on this one. However, I would like to point out two things:
1. Since the earth is finite all companies will eventually reach growth limits. I see nothing wrong with a company eventually reaching limitations on profitable growth as long as slower growth is reflected in the valuation (as should be the case in an efficient market: i.e., about 90% of the ocasions. We, active investors, try to uncover the 10% inefficiently priced stocks). So if there is is free cash flow the best option is probably to buy back stock as argued in 2.
2. Assuming getting rid of some cash is the proper thing to do; as a shareholder, I prefer stock buy backs to dividends due to tax considerations (the buy back reduces the number of slices in the pie, thus increasing the share price. Then, I can always turn around and sell long term shares only paying a capital gains tax).
A stock buy back is preferable to the company keeping funds not needed "parked" in cash, or even worst investing it in projects with negative NPV. This been said, what is indeed odd is how often one sees companies buying back stock and then turning around and incurring the fixed expense associated with either borrowing or issuing stock. I guess some nice managers like to pay for the Hermes ties investment bankers wear using stock holders funds. I hate it!
Pancho
PS: to all you FCF guys in this group, I want to thank you for all the wonderful insights. Just one piece of advice, most investors are weak in the accounting (financial statements) and valuation side. This is not the case with you. My advice to you is to concentrate a little more on the fundamentals (e.g., the growth of the networking induestry we know should be in the order of 30%/year), studying the competition, anticipating growth trends is possibly as important or even more important than studying numbers that reflect mainly past performance. |
