Does this always pay?
Or should the investor prefer his dividends?
For every example of a company that has compounded its growth by wise investment of its cash there are several that would have done better to pass their surplus on to their stockholders.
Very rarely, one finds a management that can do both.
- For example: Company XYZ paid out almost 70% of its earnings in dividends. It has invested its cash flow internally to maximum advantage. Its shareholders have had their cake and eaten it too.
The normal way for management to look upon proposed investments is to estimate the expected amount of profit.
This varies from industry to industry.
In any case,it would be unreasonable to invest company funds unless the expected return was substantial.
One finds far too much reinvestment that fails to pay off.
It is difficult for management to understand that in some cases stockholders are paid off better with their company dead than alive.
Examine the past record.
Correct judgement of management policy can only come from a full understanding of the problems involved.
It will pay the investor well to look beyond the superficialities of figures showing totals put back into business by management.
Consideration should be given to the past record.
How have plow-back expenditures actually turned out?
There is no hard-and-fast rule.
Some stockholders profited enormously by management spending.
Other stockholders suffered through management hoarding.
Many unwise investments were made by corporate management at the wrong time.
Some very wise one were made at the right time.
This is an often overlooked factor which you should include in your analysis of stocks to buy.
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