How to Include Debt in Shareholder Yield

We all know about buybacks and dividends as part of shareholder yield. ***But we should also include debt paydown as well***. I'm finding that few people incorporate debt paydown in shareholder yield, and even fewer, still, incorporate it correctly. The mechanics work exactly the same as buybacks. When a company buys back shares, they're not returning cash to the remaining shareholders; they're returning future cash that belonged to the now retired shares. The same thing with debt. When a company pays down debt, the interest payments that belonged to debt holders are now redistributed to equity holders. But, it's not 1 for 1. Because debt is ***often*** "cheaper" capital, the value of that debt paydown is worth less to equity holders than the par value of that debt. A quick example: A company has $500 million at 1% interest (annual interest payments of $5 million per year). They pay down that $500 million block of debt once it reaches maturity. Now, that $5 million in interest payments belongs to equity holders. If the cost of equity is 8%, that $5 million is worth $62.5 million to equity holders. *Note that this is much less than the $500 million that was paid down.* Now say that the company is valued at a $10 billion market cap. The shareholder yield attributed to debt paydown would be 0.62% (not the 5% had we assumed the full $500 million par value). There's additional nuance in that an overleveraged company not only has higher cost of debt, the overleveraged condition actually adds risk to equity, which can increase the cost of equity. In cases such as these, paying down debt (and deleveraging the business) can have an amplified effect - instead of a small fraction of debt paydown going toward shareholder yield, that ratio can approach or exceed 1.0 [Here's the full article that covers this topic more clearly. ](https://riskpremium.substack.com/p/shareholder-yield)