Companies pumping their own stocks with borrowed money, what could go wrong?

[alani123]

"Despite all the claims that U.S. companies are awash with cash and have “never had it so good,” an analysis by investment bank SG Securities calculates that in reality Corporate America has “overspent” in recent years to the tune of hundreds of billions of dollars. Over the past five years, equity prices have almost doubled — but so has the net debt of nonfinancial companies. Both have outstripped a 60% rise in profits. Or, to put it another way, since March 2009, the cash pile of non-financial U.S. corporations has risen by $570 billion, but debt has risen by $1.6 trillion. Indeed over the past year net debt has risen about 20%,SG estimates — while gross cash flows have risen a more modest 4%. Indeed, “it is also those companies with the weakest sales growth that are buying back the most,” warns SG quantitative strategist Andrew Lapthorne in a new report for clients."
http://www.marketwatch.com/story/why-are-stock-prices-so-high-follow-the-borrowed-money-2015-05-07

[GangkisKhan]

If you can borrow at close to 0% rate to do whatever, wouldn't you do  the same?

[aso118]

If you can borrow at close to 0% rate to do whatever, wouldn't you do  the same?

When it is payback time, companies will discover that it is not easy. If there is a stock market meltdown, issuing equity won't be easy. Stockholders won't like companies cutting dividends either.

[johnyj]

Maybe Greece will suddenly default and followed by other southern European countries, and who will be the biggest loser? Those who heavily invested in government bonds, typically pension funds and social security funds. But the fail of those investments only hurt the old people and unemployed people

[efreeti]

If you can borrow at close to 0% rate to do whatever, wouldn't you do  the same?

When it is payback time, companies will discover that it is not easy. If there is a stock market meltdown, issuing equity won't be easy. Stockholders won't like companies cutting dividends either.

If the rate is low, there is no reason to pay back. Dividend is always slightly higher than interest rate for a stable company, less equity out there means less dividend to pay.

[alani123]

Maybe Greece will suddenly default and followed by other southern European countries, and who will be the biggest loser? Those who heavily invested in government bonds, typically pension funds and social security funds. But the fail of those investments only hurt the old people and unemployed people

What does that have to do with companies pumping their own stocks?

[aso118]

If you can borrow at close to 0% rate to do whatever, wouldn't you do  the same?

When it is payback time, companies will discover that it is not easy. If there is a stock market meltdown, issuing equity won't be easy. Stockholders won't like companies cutting dividends either.

If the rate is low, there is no reason to pay back. Dividend is always slightly higher than interest rate for a stable company, less equity out there means less dividend to pay.

That is true. Cost of equity is higher than cost of debt. As long as you have stable operations, you can chug along. The problem comes when there is a disruption in the market and you are unable to refinance your debt.