POSITIVE OUTCOME OF THE FISCAL CLIFF

POSITIVE OUTCOME OF THE FISCAL CLIFF

Matt HealeyWednesday,5 December 2012

The Snap

There are too many companies with too much cash on their balance sheets. Since I am in tech, I have investigated the worst offenders in terms of hoarding cash.

Cisco (CSCO): $4.8 Billion in cash and $40.2 Billion in short term investments as of 10/27
Apple (AAPL): $10.7 Billion in cash and $18.4 Billion in short term investments as of 9/28
Microsoft (MSFT): $5.0 Billion in cash and $61.6 Billion in short term investments as of 9/28
Google (GOOG): $16.3 Billion in cash and $29.5 Billion in short term investments as of 9/28
Oracle (ORCL): $15.7 Billion in cash and $15.9 Billion in short term investments as of 8/31

These are all companies that have been building up massive cash positions. Basic corporate finance says that if you can not invest the cash in a way that is expected to provide better returns than the shareholders could do on their own, you should return it to the shareholders. The reason they are hoarding it is due to a fucked up tax code.

The Download

The problem is that many of these companies do not want to return the cash because they are dominated by large insider shareholders who do not want to take the personal tax hit on the dividend payment. As a result, they keep the money locked up, earning a few percent in government securities. This is not an efficient use of cash. If that is what you are going to do with my money — and it is my money as a shareholder — return it to me.

However, now there is an event that is scaring the major shareholders. They face the possibility of higher capital gains taxes and dividend taxes. So, to avoid having to pay the higher taxes, these large insider shareholders are accelerating regular dividends and issuing special dividends that will be paid before the end of the year, and thus taxed at the current lower rates. From November 1-28, 173 companies have announced special dividends compared to 72 in all of November 2011. Personally, I think this is a very good development. Companies should keep enough cash on their balance sheets to be able to operate, but should not hoard cash, keeping it locked up in low performing investments.

Hat Tips

Special Dividends, Image Credit: Wikimedia Commons {{PD-US}}

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Trackbacks

  1. […] once when the money is made for the corporation and once more when it is paid to share holders. As I have written about before, this leads to an inefficient use of the cash. Allowing corporations to pay dividends out of […]

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