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> least a third of the shares are being repurchased with borrowed money What?! That is insane. Right? Like I know I’m just a lowly programmer who doesn’t know

> least a third of the shares are being repurchased with borrowed money What?! That is insane. Right? Like I know I’m just a lowly programmer who doesn’t know jack all about finance, but I thought the whole point of a buy back was that your public company was flush with cash and instead of spending it on capital expenses (am I using that word right? I mean things that grow the business, like say, Facebook buying Instagram) you spent it on buying stock from shareholders. What the heck is the point of a buy back purchase with debt?! I really don’t understand. If the article explains it and I missed it, it would be awesome to have it pointed out.

iamforreal 8y ago
I'm extra confused because I thought in some sense stock was the collateral (or at least a component of collateral) for said debt.
marticode 8y ago
Sometimes the company can make better use of it's existing capital by using debt (especially when debt is cheap as it is now). This means it has more capital than needed - so it returns that capital to shareholders using buybacks and finances itself through issuing debt.
roenxi 8y ago
For the record, I also think it is an insane practice and would personally take the buyback as an opportunity to sell. That being said, here is a view from which it might make sense: 0) Assume that there is an optimum debt/equity ratio for a company (no idea how it shakes out in practice, but there is probably some rule or theory that suggests an optimum debt level, like the Kelly Criterion suggests an optimum quantity to risk compared to available capital). 1) The accountants have calculated that due to the difference between your return on capital and the market interest rate, you should have borrowings equal to 20% of your shareholders equity. 2) The company's shareholder equity grows organically because it is doing well. 3) The company wants a higher debt/capital ratio, and investors are demanding some profit be returned to them, so borrow the dividend money directly and gives it out as a share buyback, optimising the debt/equity ratio at the same time. This is an administratively neat way of getting the money for the buyback together in one place. There is a fuzzy spot in the argument in that you are returning money to investors at the same time as your return on capital is better than the market, but stranger decisions get made. CEOs and investors don't complain about high stock prices.
deleted 8y ago
[deleted]
gtycomb 8y ago
There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you. Or it may be that the big wigs looks around asking, where is the best place to invest in stocks...who else, but me! This show of confidence in the future performance of your company can be good marketing for your own stock value.
- compcoffee 8y ago
  >There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you. When you are a public company you've made the choice that you are always for sale.
jonknee 8y ago
It depends on the firm, but Apple is a great example of a company that took out tons of debt to buy back shares (and pay dividends) and it made total sense. The reason was they were holding tons of profits from overseas that they didn't want to pay tax on. Apple being Apple was able to get really low rates on bonds and that turns out to be way cheaper than paying tax and using those profits for anything. Interest rates are moving up now, but have been really low for a long time. If you pay out a decent dividend it can make financial sense to loan money to buy back shares just on not having to pay the dividend (if you pay a 5% dividend like Ford does, but can issue bonds at 3%, I mean why not?). There's also the factor that since interest payments are tax deductible, it further pushes the cost of interest rates lower. tl;dr it usually comes down to tax and accounting reasons.
- methodover 8y ago
  Ahh, okay. So, it's basically a tax avoidance idea. If my stock buyback costs 20% in taxes on overseas profits, or 10% interest in bonds, then I'll take the bonds. But wait. Taxes are a one-time thing, right? You pay the 20% (or whatever it is) and you're done. You're going to have to pay those bonds back sometime, right? Wouldn't you need to pay them off and have to pay that 20% tax rate? Oh I bet not. I bet there's some tax avoidance trickery that means you pay less in taxes if it's paying off bonds, right?
  - deleted 8y ago
    [deleted]
  - jonknee 8y ago
    The tax rate was 35%, bond rates more like 2.5-4.5% (depending on the length) and interest being deductible the actual impact less than that. The recent tax cut made this all quite worthwhile.
twblalock 8y ago
Businesses use debt as a tool. It doesn't mean they don't also have revenue and cash reserves -- it just means they have calculated they will be better off leveraging debt than spending cash for certain things. Think about it this way -- if you wanted to buy a car, and you had enough money in the stock market, you could sell your stocks and pay cash for the car. Or, you could get a car loan at a pretty low interest rate. Why would you take the loan? You might take the loan because the money you would make by leaving your cash in the stock market (and avoiding capital gains taxes triggered by selling shares) would almost certainly be larger than the interest you would pay on a car loan. So it might make sense to take the loan and leave your investments alone. There are not a lot of personal decisions that turn out like that, but a lot of business decisions turn out like that.
- polotics 8y ago
  Businesses != Managers != Private equity sharks. Time horizons vary, debts and buybacks are "in the game"...
im3w1l 8y ago
They are doing a similar thing as a bank. They are using their position as trustworthy and reliable to take money from people with low risk appetite (bondholders) and handing it to money with higher risk appetite (stockholders) so they can invest it. This increases the risk that Apple crashes and burns but (ideally) the increase is low enough that all parties come out ahead.
KMag 8y ago
If you have tons of cash from overseas revenues that you have sitting in your offshore subsidiaries that you don't want to pay domestic taxes on, and you can use that overseas cash as collateral for low-interest loans domestically, and you believe corporate taxes on overseas earnings brought onshore will likely be lower in the future, then it makes sense to pay dividends and buy back shares using onshore loans against offshore holdings. Though, for buybacks, I wonder why the overseas subsidiary doesn't buy shares of the domestic parent. Perhaps that tax loophole has already been plugged.
thisisit 8y ago
It is insane. And it is entirely fueled by access to cheap money. Rates for the past decade has been near 1% and only recently started climbing but still below 2%. I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing. And that means over time these companies can borrow even more money on their "growth". The cycle repeats.
- compcoffee 8y ago
  >I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing Another oft-repeated trope that doesn't follow in the data. In fact, most of the companies doing the biggest buybacks recently have had underperforming share prices. Buybacks can be good or bad, smart or stupid, just like any other "investment". Read Damodaran.

iamforreal 8y ago

I'm extra confused because I thought in some sense stock was the collateral (or at least a component of collateral) for said debt.

marticode 8y ago

Sometimes the company can make better use of it's existing capital by using debt (especially when debt is cheap as it is now). This means it has more capital than needed - so it returns that capital to shareholders using buybacks and finances itself through issuing debt.

roenxi 8y ago

For the record, I also think it is an insane practice and would personally take the buyback as an opportunity to sell. That being said, here is a view from which it might make sense: 0) Assume that there is an optimum debt/equity ratio for a company (no idea how it shakes out in practice, but there is probably some rule or theory that suggests an optimum debt level, like the Kelly Criterion suggests an optimum quantity to risk compared to available capital). 1) The accountants have calculated that due to the difference between your return on capital and the market interest rate, you should have borrowings equal to 20% of your shareholders equity. 2) The company's shareholder equity grows organically because it is doing well. 3) The company wants a higher debt/capital ratio, and investors are demanding some profit be returned to them, so borrow the dividend money directly and gives it out as a share buyback, optimising the debt/equity ratio at the same time. This is an administratively neat way of getting the money for the buyback together in one place. There is a fuzzy spot in the argument in that you are returning money to investors at the same time as your return on capital is better than the market, but stranger decisions get made. CEOs and investors don't complain about high stock prices.

deleted 8y ago

[deleted]

gtycomb 8y ago

There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you. Or it may be that the big wigs looks around asking, where is the best place to invest in stocks...who else, but me! This show of confidence in the future performance of your company can be good marketing for your own stock value.

compcoffee 8y ago
>There are strategic situations where carrying the debt load is good for you -- you are not so attractive a buy for an outsider who wants to acquire you. When you are a public company you've made the choice that you are always for sale.

jonknee 8y ago

It depends on the firm, but Apple is a great example of a company that took out tons of debt to buy back shares (and pay dividends) and it made total sense. The reason was they were holding tons of profits from overseas that they didn't want to pay tax on. Apple being Apple was able to get really low rates on bonds and that turns out to be way cheaper than paying tax and using those profits for anything. Interest rates are moving up now, but have been really low for a long time. If you pay out a decent dividend it can make financial sense to loan money to buy back shares just on not having to pay the dividend (if you pay a 5% dividend like Ford does, but can issue bonds at 3%, I mean why not?). There's also the factor that since interest payments are tax deductible, it further pushes the cost of interest rates lower. tl;dr it usually comes down to tax and accounting reasons.

methodover 8y ago
Ahh, okay. So, it's basically a tax avoidance idea. If my stock buyback costs 20% in taxes on overseas profits, or 10% interest in bonds, then I'll take the bonds. But wait. Taxes are a one-time thing, right? You pay the 20% (or whatever it is) and you're done. You're going to have to pay those bonds back sometime, right? Wouldn't you need to pay them off and have to pay that 20% tax rate? Oh I bet not. I bet there's some tax avoidance trickery that means you pay less in taxes if it's paying off bonds, right?
- deleted 8y ago
  [deleted]
- jonknee 8y ago
  The tax rate was 35%, bond rates more like 2.5-4.5% (depending on the length) and interest being deductible the actual impact less than that. The recent tax cut made this all quite worthwhile.

twblalock 8y ago

Businesses use debt as a tool. It doesn't mean they don't also have revenue and cash reserves -- it just means they have calculated they will be better off leveraging debt than spending cash for certain things. Think about it this way -- if you wanted to buy a car, and you had enough money in the stock market, you could sell your stocks and pay cash for the car. Or, you could get a car loan at a pretty low interest rate. Why would you take the loan? You might take the loan because the money you would make by leaving your cash in the stock market (and avoiding capital gains taxes triggered by selling shares) would almost certainly be larger than the interest you would pay on a car loan. So it might make sense to take the loan and leave your investments alone. There are not a lot of personal decisions that turn out like that, but a lot of business decisions turn out like that.

polotics 8y ago
Businesses != Managers != Private equity sharks. Time horizons vary, debts and buybacks are "in the game"...

im3w1l 8y ago

They are doing a similar thing as a bank. They are using their position as trustworthy and reliable to take money from people with low risk appetite (bondholders) and handing it to money with higher risk appetite (stockholders) so they can invest it. This increases the risk that Apple crashes and burns but (ideally) the increase is low enough that all parties come out ahead.

KMag 8y ago

If you have tons of cash from overseas revenues that you have sitting in your offshore subsidiaries that you don't want to pay domestic taxes on, and you can use that overseas cash as collateral for low-interest loans domestically, and you believe corporate taxes on overseas earnings brought onshore will likely be lower in the future, then it makes sense to pay dividends and buy back shares using onshore loans against offshore holdings. Though, for buybacks, I wonder why the overseas subsidiary doesn't buy shares of the domestic parent. Perhaps that tax loophole has already been plugged.

thisisit 8y ago

It is insane. And it is entirely fueled by access to cheap money. Rates for the past decade has been near 1% and only recently started climbing but still below 2%. I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing. And that means over time these companies can borrow even more money on their "growth". The cycle repeats.

compcoffee 8y ago
>I can't speak for Apple et al but for some companies it has been a tool to raise their share price. With shrinking outstanding number of shares financial ratios like EPS etc start to look big even when the company isn't actually growing Another oft-repeated trope that doesn't follow in the data. In fact, most of the companies doing the biggest buybacks recently have had underperforming share prices. Buybacks can be good or bad, smart or stupid, just like any other "investment". Read Damodaran.