Originally Posted by Texas Proud
You just have to balance the two so you do not get in a cash crunch if the economy goes down...
That's exactly it.
Borrowing money and then paying it out in dividends is equivalant to converting existing equity to debt ("levering up").
That's all fine and dandy as long as the return on capital is higher than the interest rate on the bonds, and indeed if the business can renew loans or pay the principal back when due as well under all circumstances (including a really serious depression).
In that case shareholders are getting a great deal: e.g. cost of capital 5% and return on capital 15% means for every borrowed dollar you "win" 10%.
If your business is volatile, sensitive to economic cycles or consumes more cash than it generates, trouble can come to town really fast though. After 2008 some companies learned some hard real life lessons there. Better err on the safe side.
As a general statement saying "it's nuts" is not really useful. Some companies also borrow because they have cash plenty overseas, but don't want to bring it "home" to postpone paying taxes for as long as possible.
Statement seems to be taken out of context it seems.Stan Druckenmiller is a very smart guy.