We are all taught the same first principle. A business is worth the present value of the cash it will generate. Around it sits a substantial apparatus: returns on invested capital, discount rates, terminal assumptions. A new plant is tested against incremental returns, a buyback against price versus intrinsic value.
Then management says it is deleveraging, and the analysis stops.
Start with the common filter, free cash flow. Free cash flow is not automatically the shareholder’s cash flow. Levered or unlevered, it is struck before principal repayments and preferred dividends. The common shareholder stands last in that queue.
The free cash flow yield is not the shareholder’s yield. The company earns the cash. What reaches the common equity is whatever survives the claims ahead of it, and where those claims are heavy, that can be little.
Cash allocated to retiring one of those claims is an allocation decision with a price, a benefit, and an opportunity cost, like a factory or a buyback. It is a third use of cash, alongside reinvestment and return of capital. Call it balance sheet repair.
Occidental Petroleum makes a useful case study because its terms are unusually explicit.
