Reduce debt or repurchase shares: which is better for investors?
Posted by: in Stocks Money NewsFiled under: Management
Investors will want to read a brief article by Marie Leone on this question in CFO Magazine. There are 4 main ways a company can choose to utilize its cash flow. Of course, a company can choose to reduce its debt load in order to preserve or raise its credit rating. Bondholders would certainly agree with this approach, though shareholders would more likely tolerate a higher leverage of net debt to EBITDA (Earnings before interest, taxes, depreciation and amortization). A company can also use its free cash flow to invest in opportunities that are an acceptable combination of growth potential vs. risk. A company can also choose to put some money back in shareholders’ pockets by paying out a dividend or by repurchasing its stock.
There is not one single approach that is optimal in all circumstances. What matters most is that a company in fact has a transparent cash management policy in place that factors in the direct relationship between a company’s target debt level and its share repurchases. It also matters that investors can find out what the company policy is.
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