Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
That doesn’t mean Yacktman won’t touch a tinier name. He just
believes the level of safety increases dramatically when investing in
bigger businesses. “The trade-off is as companies grow larger, managements
sometimes invest free cash flow in such a way that the return
on assets starts to fall,” he admits. “So we almost always have
a higher hurdle that we make smaller companies jump over.”
WATCH OUT FOR DEBT
Low debt is another risk-reducing sign in Yacktman’s book. Admittedly,
most of the time capital-intensive companies must borrow
money to achieve a high return on assets. Yacktman contends that if
a business he owns takes out a loan, it’s usually because it’s looking
for a way to enhance overall returns. “The company doesn’t need the
money to get an adequate return on assets,” he insists. “This isn’t to
say a business shouldn’t have any debt, because I think it should. It
keeps the cost of capital down. The ideal capital-structure strategy
for a business is to run it with single A credit, but not to pay a dividend.
Reebok is a good example. The company made a marvelous
move when it repurchased stock in a Dutch tender and eliminated its
dividend. This charge allowed all of the cash flow to be applied to
debt repayment. It also meant if the stock came down, management
was in a position to buy back more shares. This is how I would run
the financial side of a company. I wouldn’t pay a dividend, and I’d
try to operate it with a single A credit rating, because I think that’s
the best combination of financial engineering you can hope for.”
Furthermore, even if it is a good, low-debt business, Yacktman,
like Davis, normally avoids companies that are cyclical in nature,
especially since he wants to be a long-term holder. “Lindsay Manufacturing
is a company I recently passed on,” he reveals. “This is a
tiny but good operation. It makes those wide lawn sprinkler systems
on wheels that are used in farming, which is a very profitable business.
But how long can you keep getting a steady stream of orders? This
industry is very cyclical. If farmers have a bad period, they’re going
to slow down their purchases of sprinklers. The company might be
doing well now, because the farming industry is strong, but that won’t
last forever. Once more, it is a capital-goods-oriented business, which
means there is a continuous swing in volume.”
Yacktman also tries to avoid such cyclical industries as the airlines,
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