Why Firms may pay out less than is available

For several reasons, many firms pay out less to stockholders, in the form of dividends and stock buybacks, than they have available in free cash flows to equity. The reasons vary from firm to firm and we list some below -

• The managers of a firm may gain by retaining cash rather than paying it out as a dividend. The desire for empire building may make increasing the size of the firm an objective on its own. Or, management may feel the need to build up a cash cushion to tide over periods when earnings may dip; in such periods, the cash cushion may reduce or obscure the earnings drop and may allow managers to remain in control.

• The firm may be unsure about its future financing needs and may choose to retain some cash to take on unexpected investments or meet unanticipated needs.

• The firm may have volatile earnings and may retain cash to help smooth out dividends over time.

• Bondholders may impose restrictions on cash payments to stockholders, which may prevent the firm from returning available cash flows to its stockholders.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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