Tip, There is always an excuse during a bull market. The simple fact is, these cos have little or no free cash flow, and that is why they are borrowing. Buying back stock with free cash flow and taking on debt to fund operations is not illegal and not even necessarily a bad thing. Zeev mentioned all the positives. The main thing is, you are leveraging your good earnings by taking down debt at low rates. In fact, in the case of IBM, all of their eps growth is due to this leverage. Zeev would say that is good. I would say it is risky. In order to believe that this is a good thing, you have to believe several pollyanna concepts:
1. Rates will not go up significantly. Otherwise, your debt service costs will hurt your earnings and reduce the amount of capital spending you might otherwise do.
2. Your eps have to keep going up. If your eps do not grow by more than the rate you are paying on your debt, and they are not right now for many, many cos., then you are in deep kimshee.
3. Co. mgt. can invest the cash better than the shareholders can. This has been proven to be true at other major non-dividend payers over the years. Names like Apple and DEC, which still exist, and Mohawk and Commodore, which do not. My feeling is that companies that have real cash flow pay dividends. Smaller cos. can be excused for hording all their cash. Companies like Dell make me think they are just faking the eps or that they know they won't last long.
MB |
