Every once in awhile you get a graphic example of greed that everyone can see in plain sight. This example comes from a report in the press this week about HCA Inc., one of the nation’s largest hospital operators. It seems its private equity owners want to pull some cash out of the company, but it hasn’t yet generated enough profits to pay for the planned $2 billion dividend. KKR & Co. and Bain Capital don’t want to wait for real profits. What to do?
Let’s have HCA sell bonds – that means borrow money from the investing public – and use the loan proceeds to pay the dividend. Today’s owners get the money today. The company will repay the loan out of future profits, if they have any. Oh, by the way, since private equity firms often buy and sell their portfolio companies, it’s easy to see how this will play out. The PE firms will sell HCA down the road, after cashing their dividend checks, and the new owners, often public stockholders like you and me, will get a less valuable company because it’s earnings have been mortgaged to pay that huge dividend to its prior owners.
Sound like a rare example of visible greed? S&P reports companies have borrowed over $40 billion this year alone for just such special dividends. That’s B for billions. Not so rare after all. In 2006 and 2007 there were over $50 billion a year in such payouts by various companies with large institutional shareholders.
You can bet in every case the small shareholders will at some point foot the bill for these repayments. And that makes me mad. How do you feel about it?
As always, I welcome your comments.