Lost Decade

[ICUMD]

1 hour ago, scorpioncapital said:

 

Does it matter if the variable debt is still yielding less than inflation?

In my simplified view, no.  

 

My primary focus is in always trying to increase cash flow throughout the economic cycle.  Either through dividends or debt repayment. 

 

In other words, cash flow is paramount.

Inflation and rising interest rates simply change where you get that yield from.

 

Further, I think rising interest rates increase the risk of market shocks.  So, the hope is to add quality equities with high dividend yield down the road.

Edited September 12, 2022 by ICUMD

[Gregmal]

I don’t think capital allocation or the opportunity set really have anything to do with inflation. Going back as long as I remember, people and market participants are always screaming about something. A good investment should always be obvious. 
 

Separately, folks should or would be wise to operate like companies. Always trying to carry some debt. Operate at a reasonable net debt to EV. Stagger it and roll through the cycles. Maybe take on a little more when the opportunities are greatest but mainly just be consistent.

[Lazarus]

If you think there will be a lost decade, you can always shift most of your investments to high dividend stocks as a hedge. Stuff like PM. 

[scorpioncapital]

I use the concept of look-through debt. If a company has say 50% debt and I use another 25% debt that is a look through debt which is compounded. I actually think Buffet thinks this way. He uses low cost or zero cost insurance float but tries to ensure his invested companies are not highly indebted further (utilities are an exception as they must operate with debt to get any meaningful return). E.g. look at Oxy paying down debt and becoming investment grade. 

[SharperDingaan]

4 hours ago, scorpioncapital said:

I use the concept of look-through debt. If a company has say 50% debt and I use another 25% debt that is a look through debt which is compounded. I actually think Buffet thinks this way. He uses low cost or zero cost insurance float but tries to ensure his invested companies are not highly indebted further (utilities are an exception as they must operate with debt to get any meaningful return). E.g. look at Oxy paying down debt and becoming investment grade. 

 

You might want to rethink the utilities exception ....

 

Utilities make a rate regulated return on their capital invested: they take on debt to build the most efficient plant possible (increase capital + operating efficiency), and finance it against the guaranteed revenue; the rate regulated return essentially resets the benefit of the financial leverage at a specific number. However it does not restrain the operating leverage - so managers have incentive to run the plant as efficiently as possible.

 

A specific utility is bought because management has found a 2nd operational use for it; getting paid for co-generational use of the waste heat the plant produces.

The benefit being the extra revenue stream divided over the share count x whatever the P/E multiple is - ' cause the more of this you can do, the more extra revenue, and the greater the probability of P/E expansion. Win/win 

 

SD