Remember de-equitisation? It was very popular before the Great Recession.
If not here’s a little refresher, via Bloomberg.
Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter. The company would try to raise as much as it can without jeopardizing its debt rating, the highest possible, said the person, who declined to be named because the plans are confidential and not completed. Microsoft could raise at least $5 billion without putting the rating at risk, said Jason Brady, a managing director at Thornburg Investment Management.
Chief Executive Officer Steve Ballmer is under pressure to return some of the company’s $36.8 billion in cash and short term investments to investors in the form of dividends or share buybacks. Much of that is held overseas, requiring Microsoft to pay taxes on money brought home.
That’s right, Microsoft is going to issue debt to buyback stock. And why not when debt is this cheap — the average yield on investment-grade debt is currently around 3.96 per cent according to Bloomberg — and free cash-flow yields are in excess of corporate bond yields.
UK companies who could follow Microsoft’s lead include Anglo American, British American Tobacco, AstraZeneca and GlaxoSmithKline. All of these so called mega-caps have free cashflows yields in excess of their cost of debt, low gearing and therefore are in a position to buyback stock.
Debt/equity arbitrage is back.