I would like to thank Bradley Seltzer and Konstantin Semyonov for invaluable research assistance.
Excess Cash and Shareholder Payout Strategies
Article first published online: 12 OCT 2012
Copyright © 2012 Morgan Stanley
Journal of Applied Corporate Finance
Volume 24, Issue 3, pages 39–54, Summer 2012
How to Cite
Abuaf, N. (2012), Excess Cash and Shareholder Payout Strategies. Journal of Applied Corporate Finance, 24: 39–54. doi: 10.1111/j.1745-6622.2012.00388.x
- Issue published online: 12 OCT 2012
- Article first published online: 12 OCT 2012
On March 19, 2012, Apple announced a program to distribute its “excess” cash to shareholders in the form of dividends and share buybacks. This announcement followed a pattern that is remarkably similar to the one leading up to Microsoft's announcement in 2004. Likewise IBM, the bluest of blue chips, made a path-breaking decision to initiate share buybacks in the 1980s. And as recently as April 2012, IBM, along with many other large corporations, announced yet another major share buyback program together with an increase in its dividend.
These actions underscore the reality that senior management's main job is to allocate capital efficiently—and that efficient allocation of capital means distributing it when necessary. In light of these events, and the demand from shareholders that appears to be driving them, this paper explores analytical and empirical issues related to excess cash and corporate payout policy. In so doing, it provides the outline of an analytical framework for executives when thinking about the allocation of excess cash among competing uses, including deleveraging, growth, special and regular dividends, and share buybacks.
The essence of the framework is this: Once companies satisfy their demands for cash based on their expected financial transactions, their targeted capital structure, and prospective investment (mergers and acquisitions) considerations, management should turn its attention to capital structure and shareholder payout decisions. Assuming that the company's capital structure is reasonably close to its target, and that its rating agencies are supportive, management should aim to pay a level of dividends that (1) reflects the underlying strength and stability of their projected earnings streams and that (2) satisfies the expectations of its core shareholders while positioning itself for the future. For more cyclical and otherwise riskier companies, management should also consider the use of stock buybacks or special dividends as a way of paying out the more variable, or unexpected, part of their expected earnings stream.