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Those are some phrases I have heard before. And I agree that those posting them did come off somewhat intelligent, usually. Unfortunately, I don't quite get the

Those are some phrases I have heard before. And I agree that those posting them did come off somewhat intelligent, usually. Unfortunately, I don't quite get the intended meaning here. How is a declining market threatening a profitable company that, at some point in its past, bought back shares? There are no on-going financial commitments a company has that are tied to the daily fluctuations of the stock market. Even if they have taken on debt to finance a buyback, a future decline of the stock market has no bearing on them, except to possibly make it less lucrative to issue new stock. As long as they make a profit in their core business, and those profits allow them to pay the 3% or 4% interest on any debt, they are completely save. A rise in interest rates does have a meaningful impact here, yes. But (a) interest rates have been rather stable for going on 40 years now, and this is a well-known risk that is an obvious part of any decision to take on debt. It can, and often is, also be hedged by agreeing to fixed interest rates, or hedging.

freehunter 8y ago
Buying back shares is not unsustainable in and of itself. Buying back shares to artificially inflate your stock price is. The unsustainable part is giving investors the impression that, while the Dow plunges 500 points, your stock remains stable. Then when your buybacks stop and your shares plummet with the rest of the market, it gives the impression that something suddenly happened and your company is in a dire situation. Either you keep buying shares to inflate the value (which gets expensive) or you stop and accept that your shares will go down (which looks worse now that your stock price has not declined with the rest of the market). Either way, if you're using buybacks to keep your stock price up in a market that's down, you're going to get burned eventually.
moorhosj 8y ago
The better question might be, why would a profitable company borrow money for the purpose of buying back shares? If they want to reward shareholders, they can issue a dividend. If they think the company will grow, the can invest in growth. The "argument" made is that companies think their stock is undervalued by the market and want to capture that price growth. Why would so many companies think their stocks are "undervalued" in 2018 after a 10 year bull market? Before 1982, we viewed buybacks as market manipulation and it was illegal [1]. In reality, companies do this in order to increase their stock price and earnings per share, the two things for which executives are typically compensated. If you take the same earnings and divide over fewer shares, you have magically increased your EPS without improving the actual business. [1] https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-should-be-required-to-vote-on-stock-buybacks/#50bc2d046b1e https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-...
- matt4077 8y ago
  No, the argument is that debt-financing at times is simply cheaper than equity financing. Equity carries more risk, because stockholder are paid after bondholder in the event of bankruptcy. Therefore, equity investors (stockholders) demand higher returns than lenders. Depending on a few other factors, borrowing is the better option to raise operational capital than issuing stock. Conversely, when your need for capital decreases, you no longer want to pay for it. And just as you may repay a loan (early) in that case (if you are debt-financed), you may buy back shares, if you are financed by equity.

freehunter 8y ago

Buying back shares is not unsustainable in and of itself. Buying back shares to artificially inflate your stock price is. The unsustainable part is giving investors the impression that, while the Dow plunges 500 points, your stock remains stable. Then when your buybacks stop and your shares plummet with the rest of the market, it gives the impression that something suddenly happened and your company is in a dire situation. Either you keep buying shares to inflate the value (which gets expensive) or you stop and accept that your shares will go down (which looks worse now that your stock price has not declined with the rest of the market). Either way, if you're using buybacks to keep your stock price up in a market that's down, you're going to get burned eventually.

moorhosj 8y ago

The better question might be, why would a profitable company borrow money for the purpose of buying back shares? If they want to reward shareholders, they can issue a dividend. If they think the company will grow, the can invest in growth. The "argument" made is that companies think their stock is undervalued by the market and want to capture that price growth. Why would so many companies think their stocks are "undervalued" in 2018 after a 10 year bull market? Before 1982, we viewed buybacks as market manipulation and it was illegal [1]. In reality, companies do this in order to increase their stock price and earnings per share, the two things for which executives are typically compensated. If you take the same earnings and divide over fewer shares, you have magically increased your EPS without improving the actual business. [1] https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-should-be-required-to-vote-on-stock-buybacks/#50bc2d046b1e https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-...

matt4077 8y ago
No, the argument is that debt-financing at times is simply cheaper than equity financing. Equity carries more risk, because stockholder are paid after bondholder in the event of bankruptcy. Therefore, equity investors (stockholders) demand higher returns than lenders. Depending on a few other factors, borrowing is the better option to raise operational capital than issuing stock. Conversely, when your need for capital decreases, you no longer want to pay for it. And just as you may repay a loan (early) in that case (if you are debt-financed), you may buy back shares, if you are financed by equity.