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What is the point of going into debt to buy your own stock? The economics are no different than a shop keeper getting a loan at .05% to pay himself. the actua

What is the point of going into debt to buy your own stock? The economics are no different than a shop keeper getting a loan at .05% to pay himself. the actual action in and of itself makes no sense from a business perspective. The action basically is, a company doesn't have any good investments or R&D or whatever to invest in, so i'm going to return money to shareholders to do that ...but am going to take on debt to do that...because of dat phat interest rate doh??

jcranmer 7y ago
You can write the loan interest off your taxes.
- supercanuck 7y ago
  *financial engineering
bsamuels 7y ago
If you think the value of your company is going to increase faster than the 0.05% interest on a loan from a bank, you should buy the stock then sell it again later when it has appreciated. Another important detail is that you only have so much stock you can issue. When you pay back a big wad of debt, you can take out some more debt. When you issue stock, that stock is basically gone unless you buy it back.
- supercanuck 7y ago
  Has nothing to do with value of the company. A share buyback results in an increase in share price because it reduces the number of shares of the company to buy. All things being equal. McKinsey advertises as much https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-value-of-share-buybacks https://www.mckinsey.com/business-functions/strategy-and-cor...
  - zby 7y ago
    The question was not what buyback causes - but why a company would do a buyback - and the answer was correct. If you expect that your company will be valued $1.1 (in total) next year and the current price is $1 and the rates are much lower than 0.1 - then it makes sense to borrow money and buy the shares. The company management, because of insider info, might be in a better position than the general market to evaluate if the hypothesis that the company market cap will be $1.1. They cannot use that info for trading in their own accounts - but they can do that in the company name. This might be perfectly rational.
    - supercanuck 7y ago
      You are not reading carefully. The question is why would a company use debt to finance a buy back.
      - v64 7y ago
        Let's say a company trades at $100 and that they can get a loan of $1m for 2% interest (total payment due: $1m in principal plus $20k in interest.) They use the loan to buy 10,000 shares at $100. The company does so anticipating the price of the shares will go up. Let's say the price is now $150. They sell the shares and get back $1.5m. They return the $1.02m owed for the loan and pocket the rest as profit. If you believe the growth of your company's stock price will exceed the interest rate, you can make a profit using debt to finance a buy back.
        supercanuck 7y ago
        >They return the $1.02m owed for the loan and pocket the rest as profit. This makes sense. Reduction in debt with the proceeds. Just like the other poster, you are concocting a strategy that is not happening. You hypothetical does not apply. Instead, the companies are simply taking on debt and keeping it on their balance sheet.Now that there is a downturn, they cannot service the debt and need funding to operate (e.g. bailout) They are betting that the government will keep rates low or fund them in a time of crisis because they are too big, too important to fail. They've also bought up competition so they cannot just " go away" and let new entrants enter the market.
JoshuaDavid 7y ago
> The economics are no different than a shop keeper getting a loan at .05% to pay himself. > the actual action in and of itself makes no sense from a business perspective. At 0.05%, I'm pretty sure almost any business owner would take that loan, because if there's anything that can return more than 50 cents per year per thousand dollars invested in profit or avoided losses (e.g. solar panels or an ad campaign or a camera system to prevent shoplifting or whatever) that 0.05% loan is free money. I would happily take a loan at 10 times that interest rate for as much money as you wanted to loan me.
- supercanuck 7y ago
  But they took that money to PAY themselves. Making any of the reasons you stated above would make sense, but that did not happen
  - JoshuaDavid 7y ago
    Money is fungible. They would have paid themselves with or without a loan, so the money they would have used to pay themselves if they hadn't gotten a loan can now be invested.
kgwgk 7y ago
> the actual action in and of itself makes no sense from a business perspective. It’s not a business decision, it’s a financial decision. Why do companies go into debt at all instead of financing their operations with equity only?
- dlp211 7y ago
  Risk mitigation. Financing operations in good times allows me to run my company in a downturn with cash on hand when lending tightens up. Financing paying shareholders is the opposite of this.
  - kgwgk 7y ago
    That doesn’t answer the question. Why debt and not equity? Both can be used to raise cash.

jcranmer 7y ago

You can write the loan interest off your taxes.

supercanuck 7y ago
*financial engineering

bsamuels 7y ago

If you think the value of your company is going to increase faster than the 0.05% interest on a loan from a bank, you should buy the stock then sell it again later when it has appreciated. Another important detail is that you only have so much stock you can issue. When you pay back a big wad of debt, you can take out some more debt. When you issue stock, that stock is basically gone unless you buy it back.

supercanuck 7y ago
Has nothing to do with value of the company. A share buyback results in an increase in share price because it reduces the number of shares of the company to buy. All things being equal. McKinsey advertises as much https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-value-of-share-buybacks https://www.mckinsey.com/business-functions/strategy-and-cor...
- zby 7y ago
  The question was not what buyback causes - but why a company would do a buyback - and the answer was correct. If you expect that your company will be valued $1.1 (in total) next year and the current price is $1 and the rates are much lower than 0.1 - then it makes sense to borrow money and buy the shares. The company management, because of insider info, might be in a better position than the general market to evaluate if the hypothesis that the company market cap will be $1.1. They cannot use that info for trading in their own accounts - but they can do that in the company name. This might be perfectly rational.
  - supercanuck 7y ago
    You are not reading carefully. The question is why would a company use debt to finance a buy back.
    - v64 7y ago
      Let's say a company trades at $100 and that they can get a loan of $1m for 2% interest (total payment due: $1m in principal plus $20k in interest.) They use the loan to buy 10,000 shares at $100. The company does so anticipating the price of the shares will go up. Let's say the price is now $150. They sell the shares and get back $1.5m. They return the $1.02m owed for the loan and pocket the rest as profit. If you believe the growth of your company's stock price will exceed the interest rate, you can make a profit using debt to finance a buy back.
      - supercanuck 7y ago
        >They return the $1.02m owed for the loan and pocket the rest as profit. This makes sense. Reduction in debt with the proceeds. Just like the other poster, you are concocting a strategy that is not happening. You hypothetical does not apply. Instead, the companies are simply taking on debt and keeping it on their balance sheet.Now that there is a downturn, they cannot service the debt and need funding to operate (e.g. bailout) They are betting that the government will keep rates low or fund them in a time of crisis because they are too big, too important to fail. They've also bought up competition so they cannot just " go away" and let new entrants enter the market.

JoshuaDavid 7y ago

> The economics are no different than a shop keeper getting a loan at .05% to pay himself. > the actual action in and of itself makes no sense from a business perspective. At 0.05%, I'm pretty sure almost any business owner would take that loan, because if there's anything that can return more than 50 cents per year per thousand dollars invested in profit or avoided losses (e.g. solar panels or an ad campaign or a camera system to prevent shoplifting or whatever) that 0.05% loan is free money. I would happily take a loan at 10 times that interest rate for as much money as you wanted to loan me.

supercanuck 7y ago
But they took that money to PAY themselves. Making any of the reasons you stated above would make sense, but that did not happen
- JoshuaDavid 7y ago
  Money is fungible. They would have paid themselves with or without a loan, so the money they would have used to pay themselves if they hadn't gotten a loan can now be invested.

kgwgk 7y ago

> the actual action in and of itself makes no sense from a business perspective. It’s not a business decision, it’s a financial decision. Why do companies go into debt at all instead of financing their operations with equity only?

dlp211 7y ago
Risk mitigation. Financing operations in good times allows me to run my company in a downturn with cash on hand when lending tightens up. Financing paying shareholders is the opposite of this.
- kgwgk 7y ago
  That doesn’t answer the question. Why debt and not equity? Both can be used to raise cash.