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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
by 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 agoAhh, 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 agoThe 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.