Seth Rosenwasser from Thomson Financial's Corporate Advisory Services group discusses corporate use of cash.
Transcript:
Cash and cash equivalents for the S&P 500 hit record year-end highs in 2007. With all this cash on the books; with rates of return on cash accounts so low; and with investors asking for cash to boost their own returns at the same time they're looking to lower the risk of their investments, companies now face difficult choices in their capital allocation planning.
I'm Seth Rosenwasser, from Thomson Financial, discussing corporate use of cash. What's the best use of your company's cash in these uncertain markets? Will it make sense to hold cash on the balance sheet or invest in the company, or is it better to return cash to investors?
Remember, once you decide whether to invest in the business or return cash to investors, you must chose the best means of executing on that strategy. If you're planning on reinvesting in your company, will you put your cash toward capital improvements and expenditures? Do you increase your working capital, or keep more money in rainy-day cash accounts? Or do you want to consider using cash for M&A, as part of your long-term growth plan?
Similarly, if you chose to return cash to your investors, you must decide whether it makes sense to pay down debt, to pay a dividend, or to begin a share buyback program.
There are pros and cons to each decision, and corporate officers must carefully weigh three things -- investor preferences, historical trends, and current market conditions -- before identifying their cash use strategies.
The first consideration, investor preferences, requires companies to drill down to the fund ownership level. From there, IROs can ascertain whether their shareholder base is composed mainly of yield and value-oriented investors, who may prefer a dividend, or growth and momentum oriented investors, who may prefer a buyback or even increased spending on new projects.
The second consideration, historical trends, must be examined carefully at the industry level. Information technology firms, for example, generally bought back stock through the mid 2000s, but as these companies became more well-established, many began to turn towards dividends.
Finally, current market conditions must be a strong consideration in any capital allocation plan. Right now, banks are tightening their lending standards, making it harder for companies of all sizes to get quick access to cash, so it may make sense to consider hoarding some cash until the economy strengthens.
We'll be continuing our series on Cash Use trends over the next few weeks, and will examine the pros and cons behind different capital allocation plans, so stay tuned for our future installments. In the next few weeks, we will also be releasing a white paper that examines historical and industry cash use trends. For now, I'm Seth Rosenwasser, and thank you for joining us here at Thomson Financial.
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