Some Dividends Financed With Debt (MarketWatch)

Payments for stockholders can come at bondholders’ expense

As companies rush to pay special dividends to their investors ahead of year-end, some are financing those payments by issuing debt, a move that works against the interest of their bondholders, MarketWatch points out. The story cites Costco and HCA Holdings as examples of the trend; Costco sold $3.5 billion in debt last week, in part to finance a dividend, and HCA said this week that it will sell $1 billion in debt to pay a dividend.

Companies are rolling out dividends amid expectations that the dividend tax rate will rise in the new year. Meanwhile, interest rates are quite low and there’s an appetite for corporate debt. But from the perspective of bondholders, the company has added to its debt without any offsetting boost to its ability to repay the debt.

The story notes that the extent of a company’s leverage and what the new debt will mean to cash flow are key factors. When Booz Allen said earlier this year that it planned to pay a special dividend and issue debt to pay for it, it was downgraded by both Moody’s and S&P. But MarketWatch notes that Costco hadn’t sold debt since 2007.

 

See the full story here.

 

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