In this article we analyse the possibilities for a company to spend its excess cash. The article will assume the point of view of the company.

Something to consider with every option: Tax regulation and large shareholders are relevant, but these differ on case by case basis. Every sovereign nation also has its own rules surrounding corporation and/or investors, which can dramatically affect the outcome of each discussed action. Differing rules within countries also do exist, think USA which consist of dozens of states, each with its own separate laws.

Share buybacks

Buybacks are a fairly neutral option; prices increase as soon as the new breaks (due to increased earnings+dividend per share), thereby giving cash to the ones that want it, whilst giving higher share prices to the rest. Rather positive about this option is that it circumvents many cases of taxes paid on dividend basis, as buying and selling is less often taxed, capital gains are also taxed, mostly, but to a less fixed extend than dividend.

Dividends

Dividends allow all investors to invest as they wish, making it the most versatile option, that sort of annuls the other options. Naturally there are drawbacks, there are costs associated with issuing dividends, and also there are traders who buy and sell based on dividend schedules; not a real problem but they can cause share price fluctuations. In some cases a shareholder vote is also required for every dividend, which is cumbersome.

Then there are the interim dividends, which have baffled the author to some extent: If you really have that much cash lying around, something probably went wrong in your cash planning. Please note that these are even more costly to issue, as they are unscheduled, but also potentially problematic for some investors as their tax planning might be affected (dividend tax is usually something you can deduct from regular income tax, so it is possible to optimise these).

Investing

This option is split in halve as there are two ways of investing: In the company itself (increasing production or profit in some way), or actively investing on the market (buying shares/bonds/precious metals/etc.).

Investing in the company

These are you typical expansions and large scale projects; spending money to make the entity bigger/more profitable. Smaller and younger companies usually see opportunities galore for such operations, bigger and older companies find them harder to see. The latter presumably because they have utilised many such an option in the past. For most the answer to this particular strategy is buying competitors or suppliers. Nothing wrong with that, just good business as it can reduce costs and improve profit*. There also is a survival of the fittest component in gobbling up your corporate ecosystem.

Investing as an investor

Presumably the least favourite of shareholders: A company that actively invest in other companies, instead of giving its equity holders the money to do so. Luckily the author has heard of few large companies with large portfolios; they do have them, just not a large percentage of anything really. The few cases that are know at time of writing tend to be valued at their investment and have sometimes fully shifted their focus towards it. Should be noted that the known ones are successful where the lesser known examples tend to have failed and gone bankrupt.

Hybrid

There are also companies who start buying into their core suppliers and clients, this is a combination of both discussed investment strategies: The goal, in most cases, is to enhance integration and faith in each other for at minimum the mid-term, whilst both parties are also likely to benefit from the increased business that could go towards both companies and from each other. Thereby recouping some of the expense in using each others services. Make no mistake; if the partnership and both companies are successful, both companies will significantly increase in market value.

 

*Trust buster might disagree as it reduces overall competition in the industry, ultimately this is up to elected officials to decide. We at Opinion Economics do not believe that a monopoly is a positive influence, but we do acknowledge that every environment will by natural means develop its own top of the food chain. Having a low entry bar set in regulation can reduce the risk of a single large party controlling the market for an extended period of time.