I was looking at Qwest the other day. It trades at 15% FCF yield. $1bn FCF, $4bn+ EBITDA, $7bn market cap, $12bn debt. But then I saw its balance sheet, and I remembered that thing called pension and OPEB.
When I had started working in Citi Asset Management in 2003 in the tech-telecom research team, a big problem with the telcos was the hole in their pension liabilities caused by the 3 year bear market. The pension plans in the US assume a rate of return on their equity and debt holdings, apply a discount rate and get the present value of the assets. They do something similar to calculate the PV of the liabilities (payouts to retirees, inflation on healthcare costs etc). The difference is the unfunded liability for the company. It should be thought of as a debt - company will need to borrow money to bridge the gap. There were several companies that would have declared bankruptcy had they been forced to cover their unfunded pension liabilities - I remember people talking of Lucent as one.
It was in Feb 1999 that S&P first hit 1250. Yesterday, almost 9 years after that event, S&P closed at 1244. During this time, healthcare cost inflation has continued unabated. So while the assets of the pension plan invested in US equities have given 0% return, liabilities have gone up. I am sure that several companies will again start reporting widening pension deficits - particularly the old economy companies such as telecom, auto etc.
True several companies have moved to defined contribution (401-K) rather than defined benefit ones. True several companies have renegotiated benefits with their employees (particularly autos). But their is a huge legacy of the defined benefit plans.
It is the same problem with social security. Projected assets might not meet projected liabilities.