March 2013 – Rewards Finally Come to Investors Who Risked

Rewards Finally Come to Investors Who Risked

For some shareholders, it’s raining dollars and cents. U.S. publicly-owned companies are buying back shares and issuing dividends at a frenzied pace (see link).

That sounds pretty good, right? Well, probably. After all, in doing so, companies are returning capital to owners. And the markets seem to like it; the activity has helped drive stocks to new highs.

But, on the other hand, it might also mean that companies can’t figure out anything better to do with their money. And that could signal that they’re not thinking about acquisitions or investments in R&D.

Participants at PriSim classes wrestle with a similar decision. As they manage the capital structure of their simulated companies, they must decide to pay or not to pay dividends, whether or not to buy back stock, or whether to make further investments in their business.

And believe it or not, even more cash is building up at U.S. companies:

– Much of the current investment seems to be replacement spending, not new investing.

– While stock repurchasing has increased, it’s partly offset by new stock-options paid as compensation.

– Cash is still being stockpiled in the international operations of U.S. companies rather than brought back to the U.S. where it would be taxed.

As always, we welcome your ideas and comments.