There is a nice little debate happening in the halls of corporate America that reflects the debate going around kitchen tables across America today. Where do I put my cash?
In the case of the corporation, the Chief Financial Officer has choices, but it boils down to three basic ones. First, re-invest in the business. They run all kinds of analysis to see if a project is net present value positive based on realistic opportunity costs for other uses of the cash. If the project comes up positive, they do it. If not, move to other uses. Second, they could send the money back to shareholders in the form of a dividend. Unfortunately, IRS tax policy causes most companies to step back from doing that. So, they do a stock buyback and tell their shareholders its a return of capital. I don’t think so. Lastly, they can simply park the money into a bond portfolio and wait out the storm. The nice thing about this is it’s safe. However, the duration of the bond portfolio they buy might kill them and there is risk if by chance interest rates change quickly in the short term. Fortunately for CFO’s, the Fed has given them the wink that nothing is expected to change over the course of the next year.
There is one other place corporations ought to start thinking about that I will cover later in the post.