(Side note: what does "sustainable" mean here? Usually that involves some kind of steady state, not growing indefinitely, which is always going to have limits.)
First, you'd hope they have profits, or they wouldn't be able to pay the bondholders? The question is, where do the company's future profits go?
I guess you could think of it as being a bit more like a bank? A bank provides a service to its depositors, holding their money and paying a little interest. A company does something similar for its bondholders, at higher risk than bank deposits but lower than stocks.
The company is for some reason deciding it wants to expand into the "provide a service to bondholders" business. It's a bit weird to talk about "providing bondholder value" but that's basically what they're doing, by staying in business, paying the interest, and rolling over the bonds. Stockholders get a one-time windfall when a company expands into this business, as the company for whatever reason doesn't actually need the cash.
It's a bit weird to borrow money from bondholders for this purpose, but you could think of it as doing things out of order. Instead of borrowing money to grow the business, they grow the business first, then borrow the money. Less risky that way!
You might also think of it this way: maybe some investors are looking for less risky investments. They would rather have bonds than stocks. Companies are responding to that.
Maybe we should be worried about companies being more bank-like? Life is uncertain. Why are they making guarantees they might not be able to keep? We've been this way before with banks chopping up mortgages to make "safe" investments.
One is that a new equilibrium will eventually be reached. At that point, buybacks will stop and it will hit EPS growth. I wonder if people are aware of what a huge chunk of EPS growth has been coming from buybacks in recent years. I fear the stock market may be in for a rude awakening when the buyback music stops.
The second issue is that debt has an expiry date whereas equity does not. Theoretically, the risk of not being able to roll over debt in a downturn should be reflected in the coupon a company has to pay on its debt.
We'll see whether corporate debt hasn't become too cheap already. We could once again be facing a situation where the effect of everyone having to do the same thing at the same time is not adequately priced in.
If that's the case, this can only end badly.
Sustainable means to stay in business. If you're not trying to fend off competition; if you're not trying to grow/expand; then you are waiting to die. Death =/= sustainable.
If a business doesn't have a sustainable business model, it should operate in a way that maximizes value to its shareholders as it goes through its end. Remember, preserving the corporation is not the goal; maximizing value to the shareholders is the goal.
https://www.litigationandtrial.com/2010/09/articles/series/s...
Imagine you invested money into some enterprise that promised you a share of the profits it will attempt to gain. If that enterprise never actually attempted to turn a profit, it would effectively be fraud.
Now let's imagine they do give you a share of the profits, but the enterprise spends most of its income on frivolous and unnecessary expenses and therefore the profits are very small, that would still effectively be fraud.
Therefore, the provision is to maximize value. It is the basic responsibility of anyone running a public company. Of course this is all fuzzy and you do have a lot of leeway in justifying expenses/investments, but the principle remains.
And this is where the law can step in. The shareholders can unite and take action. Or the gov can atep in. For example, the state of NY is going after Exxon Mobile for fraud, as related to EM's lack of disclosure over their role in climate change.
https://www.accountingtools.com/articles/2019/1/25/sharehold...
Preserving the the company is generally quite important in order to maximize value.
The "maximizing value" provision doesn't imply "in the short term", unless for some reason all the value is only in the short term.
If this wasn't the case, no company could ever invest in anything, because that lowers the short-term value.
Of course in practice the short term is often given preference, but that's not because of the provision.
Often it is, but not always. If the market for the company's product is going away it may make sense to just ride things down to the end, milking as much as they can as they die.
Monetizing other value in the company may also be possible, of course. The corporation could be purchased, or its parts could be sold in liquidation. The point is that survival of the corporation is not an end in itself, it's only relevant insofar as its maximizes shareholder value.
- Corporate tax vs. individual tax - Deferred tax assets - Sum-of-the-parts valuations - Internal project NPVs > NPV of investments available to an investor
Are you saying that a company should invest 100% back into itself? There are a few very successful companies that do that, but the vast majority do not. Most companies return value to shareholders regularly in the form of dividends (or buybacks).