Using Debt to Buy Back Stock

Executive Summary

Introduction: Clients have asked us about media and sell-side reports that claim near-record levels of U.S. corporate borrowing are being used to fund significant net stock repurchases in the US. Some observers worry this may be reminiscent of the poorly timed activity in 2007 when buybacks peaked just before the financial crisis. Since we had not noticed this phenomenon among many stocks that rank well in our Core Models, we thought the issue merited further investigation.

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Conclusions:

1) Prior to the Great Recession, significant additional debt was being used to fund stock repurchases. However, this does not appear to be the case currently.

2) Contrary to what some clients have reported seeing in other research, we have found that aggregate corporate net debt levels in firms above $700m in market cap have actually been in decline since 2007 and are not being used to a great extent to fund stock repurchases overall. Instead, recent stock repurchases seem to be primarily funded by free cash flow (FCF).

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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

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