Pension Funds in High Cash Flow, Not Stocks

“I started to rely on a single powerful metric, almost like blood pressure in a human, that I thought could instantly, accurately reflect the health of a cable operator: cash flow. The shorthand for this metric would become known as EBITDA—“earnings before interest, taxes, depreciation, and amortization” (and pronounced “ee-bit-dah”). That is, earnings before we deducted all those expenses to lower our tax bill. Robust, tax-sheltered cash flow became the lifeblood for early cable operators, enabling them to manage big upfront capital and operating costs, service their debt, and invest in growth despite the long timelines often required to achieve profitability.”

“I had always looked at the cable-TV business as being fundamentally different from other industries, and more akin to the real estate business, where you buy property and collect rent or lease payments in the form of monthly fees. It was obvious to me that if we were going to be measured on earnings, it would be real tough to stay in the cable industry and grow. We needed to promote a different metric to get investors interested.”

“We believed that with a tax-free pension fund it was far better to get immediate high cash flow than to invest in common stocks in competition with millions of others. Why hope that a very low divi- dend cash flow plus possible future appreciation in market value might make up the difference? This policy worked so well that whenever Textron took over a company they not only had no fu- ture cost for their salaried employees' pensions, but the actuaries were willing to give us credit for a 6 percent return on some twenty-nine other nonsalaried pension plans that we inherited when acquiring businesses.”

“ship of the company for which they worked. In our case, the plan provided that the employee could put in up to 10 percent of his sal- ary and the company would match up to 50 percent of the em- ployee's contribution. In addition, any employee could put up an additional 10 percent of his salary without the company matching it if he wished to have a larger interest in the company. The beauty of this program is that the trustees have to invest the funds in the open market in Textron common stock as fast as the money comes in. They are given no discretion to try to out- guess the swings in the market. In effect, the employee is dollar averaging his purchases of Textron stock at two-thirds of the mar- ket over the entire period in which he is employed and participates. The other feature that makes this plan attractive is that all of the dividends received are reinvested in Textron common stock. The company gets a tax deduction on its federal tax return for all of the contributions made for the benefit of its employees, but the em- ployee pays no tax on that contribution, nor on the dividends re- ceived for his benefit in the plan until he retires.”