MCY Mercury NZ ( MRP Mighty River Power)

[Aaron]

I think their debt is 1.1 billion.Massive enough for me.So in effect borrowing to pay dividends.
Why not pay it off, rather than suffer interest costs on this; dead money.
I know people talk about debt/equity ratio being OK, but is it really good debt??, or just backdoor cashflow for the Govt.
I am involved in a small private company which had debt; various business type shareholders advised paying dividends while in debt, mumbling about debt/equity ratios, I objected and was over-ruled marginally by a vote, but I note the policy was actually changed by fiat by the Directors so no dividends were paid for 5 years, debt was eliminated and the share price has gone through the roof and we now have dividends, and capital for an ambitious expansion, and when interest rates rise one day we won't be nervous.
Once a week in the Herald in the business news the ratio of dividends/earnings is published, and that's where I got the figure from.

I don't disagree with you on paying down debt as debt equals risk but if you read my post below you will see it can be argued dividends were paid from operating cashflow and borrowings were to partly cover new investment. The argument would be that the new investment will generate returns in excess of the interest rate on debt and possibly the dividend return on equity. This looks like bull**** when you go back to the overseas investments MRP wrote off prior to being offered to the public. The other argument for debt is that we have central banks worldwide whose policy is to raise the price of everything at least 2%-3% annually. Provided interest rates don't get too far ahead of inflation, inflation will take care of the debt over time. Seems wrong but I think everyone is relying on this to continue.
Another thought although it won't apply to 51% govt owned MRP is that a company's balance sheet is "lazy" if it has too little debt. This argument I am not too sure of so stand to be corrected but in some cases private equity buys the shares as dividends are low and the company is not growing so is not highly valued. They then cut jobs and make stock control more efficient and boosting profits. They then borrow to pay massive dividends from the company to themselves and when the balance sheet is no longer "lazy" (i.e. loaded up with debt) they offer the company back to the public through an IPO usually at a price much larger than they purchased it for. (think MYOB and more recently Dick Smith). Why people buy into these I don't know but good advertising and people wearing sharp suits does work.