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Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the m

Yes, debt is a cheap way to drive up stock prices under ZIRP. If you are a qualified borrower (e.g. a large corporation) then you can borrow cheap and use the money to buy your own shares. If you are lucky, your reduction in dividend expense is greater than the cost of the debt. But, share buybacks are basically “return capital to shareholders”. Put another way, it is an admission by management that they expect shareholders (at a given stock price) to be able to achieve higher return on equity/capital elsewhere. When a company buys its stock back, they are also saying something about how their long term prospects look.

nojvek 8y ago
Doesn’t this mean, fewer shareholders get to keep bigger profits? Like public companies sliding the scale towards private companies to give fewer people more power and returns.
- adventured 8y ago
  Not necessarily fewer shareholders. Fewer shares is the only certainty there. If the company is returning eg $6b per year in profit, in the form of a dividend, then that distribution is going to fewer shares as they're repurchased. Microsoft for example has had an enormous repurchase program over two decades. They've bought back something like $150 billion of stock. Yet they can have more shareholders today than when they began the first repurchase program. That's because new public investors can continue to come in. Also, formerly large ownership positions can be sold out of, de-concentrating it (eg Gates donating shares to his foundation, which then sells the shares, plausibly to a lot of new owners over time). Consider Johnson & Johnson. They could buy back their shares for 50 years and still end up with more total shareholders, as people are very attracted to their persistently rising dividend.
eldavido 8y ago
I read this differently. Disciplined companies return capital. Bad ones squander it on bad projects. All things equal, I would prefer a company invest my capital in new, good projects. But barring that, I would much prefer it's returned as a dividend/buyback than blown in silly, wasteful spending that doesn't do anything for the firm or its investors. It takes a lot of courage and intellectual honesty to return capital. It's far easier to spend it on bad things.
- candiodari 8y ago
  What about companies that loan a boatload of money to do buybacks ? Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount) I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.
  - abakker 8y ago
    By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan. In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock. If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back). Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.
    - Retric 8y ago
      If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average. Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.
nine_k 8y ago
Don't (nearly) complete buybacks also mean that company doesn't want to be ruled by the vote of (minority) shareholders? I think e.g. Dell buyback was of this type.
- abakker 8y ago
  Well, Dell didn’t do a buyback, the went private with funding from a consortium of investors including Silver Lake Capital and Microsoft. Similar idea (buying your own equity) but different in objective/degree. As a private company, you are shielded from the pressures and requirements of the public markets which can make certain corporate changes more efficient/effective/palatable.

nojvek 8y ago

Doesn’t this mean, fewer shareholders get to keep bigger profits? Like public companies sliding the scale towards private companies to give fewer people more power and returns.

adventured 8y ago
Not necessarily fewer shareholders. Fewer shares is the only certainty there. If the company is returning eg $6b per year in profit, in the form of a dividend, then that distribution is going to fewer shares as they're repurchased. Microsoft for example has had an enormous repurchase program over two decades. They've bought back something like $150 billion of stock. Yet they can have more shareholders today than when they began the first repurchase program. That's because new public investors can continue to come in. Also, formerly large ownership positions can be sold out of, de-concentrating it (eg Gates donating shares to his foundation, which then sells the shares, plausibly to a lot of new owners over time). Consider Johnson & Johnson. They could buy back their shares for 50 years and still end up with more total shareholders, as people are very attracted to their persistently rising dividend.

eldavido 8y ago

I read this differently. Disciplined companies return capital. Bad ones squander it on bad projects. All things equal, I would prefer a company invest my capital in new, good projects. But barring that, I would much prefer it's returned as a dividend/buyback than blown in silly, wasteful spending that doesn't do anything for the firm or its investors. It takes a lot of courage and intellectual honesty to return capital. It's far easier to spend it on bad things.

candiodari 8y ago
What about companies that loan a boatload of money to do buybacks ? Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount) I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.
- abakker 8y ago
  By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan. In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock. If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back). Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.
  - Retric 8y ago
    If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average. Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.

nine_k 8y ago

Don't (nearly) complete buybacks also mean that company doesn't want to be ruled by the vote of (minority) shareholders? I think e.g. Dell buyback was of this type.

abakker 8y ago
Well, Dell didn’t do a buyback, the went private with funding from a consortium of investors including Silver Lake Capital and Microsoft. Similar idea (buying your own equity) but different in objective/degree. As a private company, you are shielded from the pressures and requirements of the public markets which can make certain corporate changes more efficient/effective/palatable.