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If the firm instead took out loans to pay out dividends would you feel differently? Now what if they did it every year at a increasing pace to the point where i

If the firm instead took out loans to pay out dividends would you feel differently? Now what if they did it every year at a increasing pace to the point where it's expected that firms take on debt to support ever larger dividends? That bubble pops eventually and is what I see happening with buybacks.

chii 6y ago
taking out debt to pay out dividends does not make any change to the capital structure of a company (i.e., the debt load increased, but the equity structure stayed the same). This basically means the company is losing that money paid out, and thus, the equity's price would drop by that equivelent amount, and then added a debt obligation (so an even more loss). This, no shareholder controlled board would ever authorize taking out debt to pay dividends, unless there's some special circumstances for which this makes sense (i can't think of any atm). The difference with buybacks using debt is that buybacks changes the capital structure. I suppose if the debt is artificially cheap (say, the gov't is forcing interest rates down to lower than what the market rate _would_ be), then it makes sense from a financial perspective, to borrow money, and pay (to the shareholders) the difference between the "real" market rate and the artificial rate. But this predicates that the real rate is much higher (transactional costs, and other overheads might easily dwarf this difference in rate).
- ac29 6y ago
  > This, no shareholder controlled board would ever authorize taking out debt to pay dividends, unless there's some special circumstances Energy (oil & gas) companies certainly did last year. Those stocks are a little different than the broader market, in that investors in them generally aren't looking for appreciation in share price, they want consistently high dividends. Exxon is a good example of this.
- cudgy 6y ago
  “... taking out debt to pay out dividends does not make any change to the capital structure of a company (i.e., the debt load increased, but the equity structure stayed the same)” Sorry, but this is nonsense. Increasing debt and giving the proceeds away to shareholders definitely alters the debt ratio of a company ... basic financial accounting concept.
MrMan 6y ago
I am pretty sophisticated in terms of my acceptance of modern finance but I am a heels-dug-in naysayer when it comes to buybacks. I hate them and I think they are evil. But what can you do
- chii 6y ago
  > But what can you do you can try to convince people that buybacks are evil, and if enough concensus is reached, it will be outlawed. The problem is that there's no good evidence that it's evil in the general case, and it's hard to convince large portions of shareholders that it is.

chii 6y ago

taking out debt to pay out dividends does not make any change to the capital structure of a company (i.e., the debt load increased, but the equity structure stayed the same). This basically means the company is losing that money paid out, and thus, the equity's price would drop by that equivelent amount, and then added a debt obligation (so an even more loss). This, no shareholder controlled board would ever authorize taking out debt to pay dividends, unless there's some special circumstances for which this makes sense (i can't think of any atm). The difference with buybacks using debt is that buybacks changes the capital structure. I suppose if the debt is artificially cheap (say, the gov't is forcing interest rates down to lower than what the market rate _would_ be), then it makes sense from a financial perspective, to borrow money, and pay (to the shareholders) the difference between the "real" market rate and the artificial rate. But this predicates that the real rate is much higher (transactional costs, and other overheads might easily dwarf this difference in rate).

ac29 6y ago
> This, no shareholder controlled board would ever authorize taking out debt to pay dividends, unless there's some special circumstances Energy (oil & gas) companies certainly did last year. Those stocks are a little different than the broader market, in that investors in them generally aren't looking for appreciation in share price, they want consistently high dividends. Exxon is a good example of this.
cudgy 6y ago
“... taking out debt to pay out dividends does not make any change to the capital structure of a company (i.e., the debt load increased, but the equity structure stayed the same)” Sorry, but this is nonsense. Increasing debt and giving the proceeds away to shareholders definitely alters the debt ratio of a company ... basic financial accounting concept.

MrMan 6y ago

I am pretty sophisticated in terms of my acceptance of modern finance but I am a heels-dug-in naysayer when it comes to buybacks. I hate them and I think they are evil. But what can you do

chii 6y ago
> But what can you do you can try to convince people that buybacks are evil, and if enough concensus is reached, it will be outlawed. The problem is that there's no good evidence that it's evil in the general case, and it's hard to convince large portions of shareholders that it is.