In This Article
- Exhibit 1: Returning cash is inevitable.
- Exhibit 2: On average, US companies have returned about 60 percent of their net income to shareholders.
- Exhibit 3: Earnings multiples are not affected by the payout mix.
- Exhibit 4: Returns to shareholders are unrelated to the payout mix.
Audio is available for this article.
Most successful companies eventually find themselves generating more cash than they can reasonably reinvest in their businesses at attractive returns on capital. Even in the wake of the recent recession, investors are pressuring companies to distribute a mountain of cash they’ve accumulated in the past few years. In fact, European and US companies currently hold a total of around $2 trillion in excess cash.1
For many companies, that pressure raises several questions. How much cash should they return to shareholders and how much should they retain for investment and for managing volatility? When they do return cash to shareholders, how should they do so—through cash dividends or share repurchases?