Secondary offerings—an unexpected sign of strength?

According to conventional wisdom a secondary offering is bad for existing shareholders. After all, when a company makes a secondary offering it's issuing more stock for sale.

More stock of a business that's otherwise constant translates into lower price per share, right?

Not necessarily, says Jim Cramer.

Although the "Mad Money" host concedes the conclusion makes all the sense in the world he also says it's an old way of looking at the market.

Today, a secondary could also be a signal that management is financially shrewd and that they're unlocking value in a less conventional way.


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With interest rates at or near historic lows, "companies have been issuing equity to either pay down debt or to refinance it with cheaper debt that carries a lower interest rate," Cramer said.

"The money saved on those interest payments falls straight to the bottom line improving the health of the balance sheet. In turn shares rally.

As an example Cramer pointed out the many secondaries recently made by REITs. Ultimately he said, they were a boon for shareholders.

"That's because the money the companies raised was used to pay down expensive debt or to refinance it with cheaper debt that carried a lower interest rate," Cramer said.

And the secondaries had other bullish effects too.

"In some cases, the ratings agencies upgraded the firms because they carried less debt. In turn the upgrade produced a nice move up in the share price," Cramer said.

"Also, newly raised capital allowed the REITs to buy more properties, which may lead to greater earnings power and higher dividends down the road – again a bullish development."

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Cramer is seeing the same phenomenon play out all over the market. Therefore, he thinks the way investors view secondaries should evolve accordingly.

"They used to be nothing but bad news for shareholders. But that's not the case anymore. Forget the conventional wisdom that says a secondary stock offering always means a company is in trouble." It just might be an extremely shareholder friendly move.

The preceding insights are discussed in far greater detail in Jim Cramer's book Get Rich Carefully.

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