What can a public company do when it generates too much cash? There are several possibilities: become an acquisition target, declare a dividend, buy back its own stock, purchase assets of another company.
Becoming an acquisition target may not be the best route if a company wants to stay in business.
Acquiring other companies may be the choice, but the company would need to ensure that it does its due diligence and acquire companies that assist in creating more margins.
The popular strategy may be to repurchase shares. According to CFO.com’s August 2006 issue, companies in the S & P 500 have spent $515 billion repurchasing their own shares over the past year and a half. Repurchasing shares allows a company to engage in tax deferral benefits, while tax cuts on capital gains and qualified dividends do not provide as much tax incentives in dividend payments.
Buybacks also do not create ongoing shareholder expectations because they are one-time transactions, versus dividends that are assumed to be steady quarterly steady flows of income.
With cash in hand, there is always the risk that it will not be spent wisely, so no matter which strategy, the company should make certain that its cash position is stable and growing.
Comment Preview