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Buy Bottom Feeders Or Face Low Ex-Ante Returns

Buy Bottom Feeders Or Face Low Ex-Ante Returns

Let's face facts. The market is standing on stilts trying to catch itself from falling. Its safety net supporting prices have not been excess cash flow (leading to generous dividends) or higher earnings. Instead, companies are increasingly relying on financial engineering to support lofty valuations. For example, IBM spent $108 billion on buying back shares to triple its earnings per share growth, while revenues grew by a paltry 12%. In the S&P 500, share buybacks rose 27% y-o-y on a trailing 12-month basis, and 374 companies (75% of the index) participated in this metric manipulation. Cash flow growth remained relatively stagnant with an FCF per share of 103.85 (Dec. 2014), which is actually a 12% decline from March 2010's FCF per share of 116.37 (Factset). Nearly all of the FCF growth per share (185%) happened between December 2009 and March 2010 (Factset). So how do they fund these buybacks? Debt,… Read More …

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