Re:Stock buybacks are dangerous for the economy
by crazygringo on Tuesday March 17, 2020 @06:31PM
(#22611289)
> Taking on debt is an unusual way to return money to investors.
Not if interest rates are low.
Suppose interest is 1% and a company takes out a 5-year loan. They pay ~$1.05 to distribute $1 per share now instead of waiting 5 years to distribute it.
I, as an investor, can take that distributed $1 and reinvest it at, say, an expected rate of return of 5% -- so that in 5 years I'll have ~$1.28.
Obviously that's a much better total deal in the end. I, as an investor, want the company to take on reasonable low-interest debt for dividends or buybacks. Which is exactly why companies are doing this.
This is the middle ground between your options #1 and #2, which is financially wise for companies who expect to continue to have healthy profits. Which is exactly why companies are doing it.
Re:Stock buybacks are dangerous for the economy
by philwelch on Wednesday March 18, 2020 @06:05AM
(#22615080)
But do you see what’s going on here? You, the shareholder, are basically using the company’s credit to leverage your other investments.
Re:Stock buybacks are dangerous for the economy
by lumost on Tuesday March 17, 2020 @11:31PM
(#22613355)
Why wouldn't you as an investor, borrow against your equity holding at a low interest rate? Using the companies balance sheet seems like a mechanism to avoid liability/long-term obligations on the loan rather than producing a net economic benefit.
1. Steadily pay out dividends or buy-back stock based on profits. Buy-backs benefit those who hold onto an unwinding venture longest, whereas dividends provide an even return. Eventually when the company has nothing left to sell the business shuts down.
2. monetize the companies balance sheet and distribute money to the investors - Mortgage the assets and borrow against future earnings. The goal in this approach is to steadily transition from low-risk to high-risk debt and eventually bankrupt the company. Naively one would expect such an approach to yield ~5x the value of an otherwise mature business, and leave creditors on the hook.
The latter approach needn't be malicious either, simply leveraging a mature business until it can only support interest payments would be viable - bankruptcy would occur when the company runs into trouble and has no assets to invest.
The latter path needs to be regulated to have a healthy and stress resistant economy.