As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.
Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves.
- “Cheap Debt For Corporations Fails To Spur Economy”, Graham Bowley, The New York Times, October 4, A1
It seems that a number of blue chip companies are issuing debt at record low interest rates in order to refinance, increase dividends, buy back stock, etc.. In other words, they are using the money to improve their financial condition but very little to invest in their own businesses.
The best example of this is Microsoft (MSFT). With almost $37 billion in cash and short term securities on their balance sheet as of June 30, the company has very little need for more cash. But two weeks ago Microsoft announced the offering of $4.75 billion in bonds at record low rates. For example, it is issuing $1 billion of 10 year bonds yielding 3%.
If you can borrow money for 10 years at 3%, why not?
The day before, Microsoft announced a 3 cent increase in its quarterly dividend. That’s 12 cents a year. With 8.654 billion shares outstanding as of July 20, that represents about an additional $1 billion annually in dividend payouts.
You see what the company is doing here, right?
Now let me ask you: Would you rather be lending that money to Microsoft for 10 years at 3% or would you rather own its shares which now yield around 2.7%?
Click to enlarge:
Disclosure: Top Gun has no position in Microsoft (MSFT) shares.
