Corporations normally issue bonds to raise capital for acquisitions, to refinance debt, and to fund various strategies expected to yield long-term profits. However, increasingly, companies are issuing bonds to buy back their own stock and to pay cash dividends to shareholders. This practice has become a concern. For example, in the first half of 2015, at lead ten junk-rated or B- rated companies, including Sirius XM Holdings, Nathan’s Famous (Hotdogs), and McGraw-Hill Education, issued more than $5.4 billion in bonds at least in part to finance paying out cash dividends and buying back company stock. For all of 2014, 30 companies issued more than $14.8 billion of bonds for the same purpose. Companies in the S&P 500 in 2014 paid out a record $93.4 billion in dividends and repurchased $148 billion worth of stock – partly (or largely) by issuing corporate bonds. Stock buybacks in 2015 are on pace to exceed $600 billion, a huge increase. The CFO of Legg Mason says “debt analysts hate companies practice of using debt to fund buybacks.” A strategic decision facing corporations therefore is whether to issue bonds to raise capital to pacify shareholders with cash dividends and purchase company stock, or to issue bonds to finance strategies carefully formulated to yield greater revenues and profits.

Source: Based on Maxwell Murphy and Mike Cherney, “Bond-Funded Buybacks Draw Skeptics,” Wall Street Journal, June 16, 2015, p. B6.