Is this based on actual reported earnings or the operating
variety? I haven't looked at GM in a while.
GM will easily net $7 or $8 per share over the coming 12 months, no matter how calculated. With the share price still under $70, that puts the earnings yield over 10%. As noted above, GM borrows money for less than 6%.
At what point do you think that leveraging a company's
TANGIBLE equity in order to buy back shares becomes a net
negative even if it can be done in a way that increases EPS.
I am thinking about recession risk, business risk etc...
It all depends. I'm not so happy about Boeing doing this under current circumstances. In a year two, when the stock is double its current price, it will look like a good move. But considering all the problems Boeing has had, retiring debt would be more appropriate than borrowing more money to buy back shares.
GM is different. The cash keeps pouring in -- and GM stock is a better buy than a GM bond -- whether you're an individual investor or the Board of GM. There is a $13 billion cash cushion, over and above the buybacks, to deal with a recession. As for business risk, can you name any members of Congress that would not vote to bail out GM?
There are many companies out there right now that are buying
in shares with cash and debt at significantly above TANGIBLE
book value. They are thus shrinking the balance sheet and
making themselves look more profitable (higher ROE and more
rapid growth rate in EPS) when in reality all they are doing
is leveraging the company and potentially increasing risk.
Share buybacks reduce equity regardless of cash and debt levels relative to tangible book value -- as would any distribution of cash to shareholders.
Certainly buying in shares with free cash instead of paying
dividends is a plus if it can be done at a price that makes
sense. What I am talking about here is the financial
engineering of EPS growth and ROE in a manner that is
clearly limited.
I am finding a lot of companies that have leveraged
themselves significantly on their TANGIBLE equity. I was
sort of shocked recently by how leveraged corporate America
is when I did a recent casual glance of some companies I am
interested in.
I had been reading reports that everybody had cleaned up
their balance sheet in recent years, but I wonder if those
reports were based on book value including goodwill.
For most of the 1990's, corporate debt grew at a decreasing rate. As can be seen from the very first posting on this thread, for much of the decade debt on the DJIA grew at an average of 3.6% annually, while revenues (a less ambiguous figure than book value) grew at 5% annually.
However, the cash flow seems to have peaked in the 3rd quarter of 1997, since which there has been an uptick in corporate debt. However, it is being financed at decreasing rates of interest.
Maybe it's just the industries I am looking at that have leveraged
up.
Which ones? |
