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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (957)	11/10/1998 8:06:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 1722

Reynolds, >> GM's bond yields remain well below earnings yield of common stock (earnings/price), implying stock buybacks continue to be a better use of cash than paying down debt:<< Is this based on actual reported earnings or the operating variety? I haven't looked at GM in a while. 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... 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. 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. Maybe it's just the industries I am looking at that have leveraged up. Wayne