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Originally Posted by LessinSF
Partially agreed. Having a rainy day fund, i.e. option (1), however is not necessarily bad, as shown here. Bup option (3) is almost always worst given the evidence that stock buybacks do not generally add value equal to even paying a dividend.
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Having a rainy day fund is better for the company when the rainy day comes, but investors don't like it, because they get nothing from it. If things are otherwise going well and a company's management can withstand the pressure from investors, like Apple has, great. But when management is under pressure because they aren't outperforming other companies, (1) is not realistically an option because investors won't stand for it.
I don't understand the suggestion that buybacks add less value than paying a dividend. Neither adds any value. If a company has $50 million for either, it can either distribute $50 million to its owners in cash, or it can spend $50 to buy some of the owners out. The stock is worth more in the latter case because there's less of it, and the remaining owners each own more of the company. That's not creating value, but neither is paying a dividend.
To the point of Sebastian's Forbes article, some companies do these things with debt, especially lately, since debt has been so cheap. That seems like a way to try to fleece people into thinking that the company is performing well when it isn't. But the vice there is not the buyback -- a dividend achieved by taking on debt is just as suspect. The vice is taking on the debt in the first place when there's no good reason to do it.
Maybe someone from corporate finance can explain why there are circumstances when a company should borrow in order to distribute money to its investors.
