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Key Issues: Wendy’s Leveraged Buyback Plan

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Wendy’s leveraged buyback plan

According to analysts, Wendy’s (WEN) suggested a leveraged buyback plan in 2015. A leveraged buyback is when a company repurchases its outstanding shares through debt financing. Last year, Wendy’s returned $375 million to shareholders.

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Key issues in leveraged buyback

From the above chart, you can see that leveraged buyback involves various issues like managing additional debt taken for the buyback, organizing cash for timely servicing of debts, consolidating ownership, and exploiting favorable interest rates. However, leveraged buyback, as a strategic move, should eventually lead to the creation of shareholders’ wealth.

Recent buybacks in the industry

Recently, there are companies in the industry that planned buybacks. According to analysts, even McDonald’s (MCD) announced its plans to return $20 billion to its shareholders through share buybacks and dividends by 2016. Darden Restaurants (DRI) is a casual dining chain. Recently, it announced its plans for a leveraged buyback. Yum! Brands (YUM) also has plans for a $1 billion buyback by 2016.

Investors can access companies in the fast food restaurant industry through ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY holds about 0.35% of Darden’s Restaurants’ stock.

Impact on stocks

Home Depot (HD) is a home improvement retailer. It announced a buyback program in March 2015. According to analysts, the program impacted Home Depot’s share price favorably. In contrast, Staples (SPLS)—the office supplies specialist—announced a share buyback in 2014. However, it still isn’t able to arrest the continuing slump in share prices.

Experts think that Wendy’s leveraged buyback plan could increase its share price, but only artificially.

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