What are the benefits of issuing common stock?
There are a number of benefits associated with the issuing additional shares of common stock, though they vary for companies that are publicly held and privately held. For both privately and publicly held companies, the following benefits apply:
- Debt reduction. The funds a company receives from its sale of common stock does not have to be repaid, and there is no interest expense associated with it. Thus, if a company currently has a high debt load, it can issue common stock and use the proceeds to pay down its debt. By doing so, the company reduces its fixed costs (since interest expense has been reduced or eliminated), which makes it easier to earn a profit at lower sales levels.
- Liquidity. If company management believes that the business requires cash to see it through future down cycles in the economy, or other issues that will constrain its cash flow, issuing common stock is one potential source of the needed cash.
For only publicly held companies, the following additional benefits apply:
- Acquisitions. A public company can issue common stock to the shareholders of acquisition
targets, which they can then sell for cash. This approach is also possible for private companies, but the recipients of those shares will have a much more difficult time selling their shares.
- Credit ratings. A public company may have paid an independent credit rating agency to assign credit ratings to its securities. If the company has obtained a large amount of cash from stock sales, it will appear more financially conservative, and so the agency is more likely to assign a better credit rating.
- Float. A public company will attract more investors if it has a large pool of registered shares available that they can buy and sell. By issuing more common stock and having those shares registered with the SEC, the float increases. However, if you issue shares that are not registered, then they cannot be sold, and the float is not increased.
Offsetting these numerous benefits is the concern that issuing an excessive quantity of shares reduces the earnings per share, which is a key benchmark that is closely observed by the investment community. Thus, companies tend to be prudent with their stock issuances, despite the numerous benefits noted here.