Sunday, April 08, 2007

Free Cash Flow and Shareholder Yield - Book Review

Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor

What Is It About?

This book emphasizes using shareholder yield when considering a stock investment. By examining how companies use their free cash flow the authors hope to identify a class of companies who will increase the value of the company for the benefit of shareholders. As defined by the authors, shareholder yield represents the use of free cash flow to pay cash dividends, buyback stock, reduce debt, make rational acquisitions, and reinvestment in capital projects. The book focus on the first three factors.

What Did I Get Out Of It As A New Investor?

An excellent book for a new investor looking for an intermediate text on performing security analysis. The book contends that in the coming years those companies which focus on and produce shareholder yield will produce the best return.

The book makes the simple point that over time a low interest and inflation rate environment helps elevate the P/E ratio. Consequently, because we currently have historically low rates of interest and inflation, from this point forward P/E ratios can only stay constant or decrease as rates stay the same or rise. Therefore, stock returns through expanding P/E ratios will prove elusive.

Instead, the book puts the focus on those companies which return value to shareholders. The authors define shareholder yield as the use of free cash flow to return value direct through dividends, buybacks, and debt reduction; or the return of value using indirect means through the rational use of capital. In the author’s opinion those companies which achieve the greatest shareholder yield will do best in the near future.

While one can argue with the book’s premise, that premise deserves consideration. After all, if a corporation exists to benefit shareholders, what better why to demonstrate the commitment to shareholders than through the rational use of the free cash flow in a manner which provides the greatest yield to shareholders? The book’s pointed discussion of this topic makes it attractive to the new investor hoping to develop a model to assist in evaluating companies as suitable investments.

The Good News

A thought provoking book which presents to the new investor a paradigm in which to perform security analysis.

The Bad News

The appendix provides various mathematical formulas which allow for a study of the quantitative model discussed in the book. While appreciated, those not proficient in statistical study may desire something simpler.

The Bottom Line

Written in a clear manner and to the point, this 150 page volume earns a place as one of the better books I have read. I recommend it for the investor looking to understand more about security analysis using shareholder yield.

Other Related Reading:


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