Agreeing with Milen
It's a strange feeling, but hey, I think he's right.
Why Capital Structure Matters
Companies that repurchased stock two years ago are in a world of hurt.
By MICHAEL MILKEN
Issuing new equity can of course depress a stock's value in two ways: It increases the supply, thus lowering the price; and it "signals" that management thinks the stock price is high relative to its true value. Conversely, a company that repurchases some of its own stock signals an undervalued stock. Buying stock back, the theory goes, will reduce the supply and increase the price. Dozens of finance students have earned Ph.D.s by describing such signaling dynamics. But history has shown that both theories about lowering and raising stock prices are wrong with regard to deleveraging by companies that are seen as credit risks.
Two recent examples are Alcoa and Johnson Controls each of which saw its stock price increase sharply after a new equity issue last month. This has happened repeatedly over the past 40 years. When a company uses the proceeds from issuance of stock or an equity-linked security to deleverage by paying off debt, the perception of credit risk declines, and the stock price generally rises.
This is what I believe is the key issue. The "signal" has, for too long, been more important than business reality. Simply put, companies were buying stock in order to drive up their stock prices, not because it made the best sense as far as allocating capital.