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As the Alex cartoon posted by mauricemir points out, the majority of companies doing stock buybacks are not doing it from profits. They are taking on additiona
by pdq 12y ago
As the Alex cartoon posted by mauricemir points out, the majority of companies doing stock buybacks are not doing it from profits. They are taking on additional debt through bonds to buy their own stock.
This may look good in the short term, while bond rates are at historic lows, but once they go back to normal levels, the companies will need to sell their own stock to pay the bonds off.
If companies don't want to distribute dividends, the smartest thing for companies to do is invest in additional R&D. This accelerates companies' growth, whereas buybacks just artificially inflate the individual share value.
- evanpw 12y ago1. Even Apple borrows money for buybacks rather than spending their giant cash hoard. The reason is taxes. Companies have a lot of cash generated overseas, and if they brought that cash back into the US in order to buy back stock, they would have to pay US corporate income tax on it, at a rate of something like 35%. From that perspective, a 2% fee to the bankers is a steal. 2. As far as I know, most corporate bonds don't have a floating interest rate, so those companies have the option of paying off the bonds at maturity and then just not borrowing more if interest rates have risen. They don't have to continue the buybacks under that scenario, because investors don't expect buybacks to be consistent from year to year -- another advantage over dividends. 3. Pouring money into R&D instead of returning money to shareholders only makes sense if the company can get a better rate of return than shareholders can get somewhere else. For a large, mature company that may well not be true. In that case, they should stick to what they do well, send the profits back to the shareholders, and let them invest it into some growing company which can make better use of the money.