Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, May 29, 2012

what to do with all that money?

Businesses exist to make money. They spend some money to make some product, turn around and sell that. When they sell their product, businesses generally try to sell it for more than it cost. They can use this extra money to pay themselves well, or invest and grow, making more products or inventing new ones.

As an investor, I always like it when my companies decide to pay me. Returning money directly to shareholders either by buying back their stock or paying a dividend is usually quite rewarding. (I prefer dividends to buybacks, but thats another topic entirely). Business owners like the cash return of dividends, or the increasing share of profit that results from them sticking around through large stock buybacks.

More importantly though, is investing in the business. Companies need to spend money to maintain their operations, replace old machinery, develop new products, hire new talent. Some of these are short term expenses, and some are long term capital investments. Word on the street is that companies are paring back their stock buyback plans in favor of more spending. This is really great news, the companies are ensuring their long term sustainability and growth, and the economy gets a boost from the spending. The growing economy will be good for the companies, who in turn can invest more in their future... you see the pattern.