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.
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.