Yesterday, I posted on Microsoft’s burning of the corporate commons. There is a strong tendency for American business to be done this way and for investors to foolishly pile into “growth stocks” whose value is growing for no one but the management and the few investors smart enough to exit the game before the music stops.
It doesn’t have to be that way though. Witness, Worldwide Wrestling Entertainment. Clearly an explosive story in the 90s, the WWE is now facing stiff competition from Ultimate Fighting and is seeing its attendance fall. This hasn’t stopped chairman Vince McMahon from jacking up the dividend, often in excess of earnings.
The result is the WWE is burning down its signficant cash holdings
And in the process enriching its shareholders and freeing up resources to be used in the rest of the economy.
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Friday ~ January 14th, 2011 at 12:18 pm
sardonic_sob
I attended a conference for corporate GC’s* back in 2007 where the topic of asset retention (keeping profits on hand as cash) versus investing them and/or distributing them vis-a-vis the corporate duty to the shareholders came up. The strong consensus – which got a lot of head-nodding from the crowd – was that the days of retaining cash were over. If you had cash in the bank, either you spent it to expand, you bought your stock back with it, or you distributed it as a dividend. You were derelict in your duty to the shareholders to just keep it around, not doing anything.
I thought about that discussion a lot over the years that followed. Especially when the commercial paper markets really went to Hell. A few months’ operating expenses in cash would have made a lot of difference to a lot of businesses.
The thing is, though, you’re right, in that *if the business’s future prospects are limited,* keeping cash in it just to extend its lifetime (but not its cumulative profits) really *is* inefficient and bad for the shareholders. Ideally, the solution to this is to use the cash in ways which *will* extend its cumulative profits, either by more efficiently exploiting the resources it has or entering new and related fields of business where future prospects are brighter.
*To give you an idea of what kind of lawyers go to these, one speaker discussing SOX commented that, “REALLY small companies, anybody below a hundred million in revenue, shouldn’t have to do this stuff, it’s too much work for no good reason.”