It is usually a good thing when companies dividend out cash to the owners rather than investing it in some self-aggrandizing managerial wish list. Robert Arnott and Clifford Asness did a nifty little 18-page paper that looks at the issue:
Surprise! Higher Dividends= Higher Earnings Growth
It’s no secret corporate America is sitting on a huge stash of cash these days, and investors are watching closely to see when/if/how they plan to spend it.
First, what not to do, according to my colleague Matt Phillips: use the extra cash to expand capacity. It seems investors are skittish about companies getting too gung-ho with the economy still on the mend.
But if investors don’t seem to crave aggressive business strategies, what’s a big cash-rich corporation to do?
General Electric offers one example. On Friday, the blue-chip announced it would raise its dividend by 20% and reinstate a share-buyback plan, the first dividend increase since the company slashed its dividend in early 2009.
GE shares have been reaping a short-term windfall from that decision. They’re up more than 5% in the past few days, an apparent vindication of an idea often overlooked by corporate chiefs: If you’re not going to spend all that cash, why not return it to shareholders?
But dividend-payers and buy-backers have their detractors too. Ken Hackel of CT Capital LLC, who runs a blog at www.credittrends.com, has been on a mini-crusade against the two practices, which he says may win some fans in the short term, but should be a flashing red light signal that management is bankrupt of new ideas....MORE