Commentary from Martin Schroeter, CFO of IBM (quoted)
Analysis by Ryan Hunter (italicized)
Note: Mr. Schroeter’s commentary was prompted in part by coverage and commentary from @andrewrsorkin on @CNBC
“There has been a growing debate about whether companies should:
1. Reinvest for growth
2. Return capital to shareholders
…with the assertion that one precludes the other. It is a false choice, as demonstrated year in and year out by companies with sustainable models.”
This is a fundamental trade-off companies must judiciously contemplate in order to grow their business; and serve their shareholders. Opinions regarding which is option is “right” are rampant and the issue intensely debated by management, boards of directors, fund managers, activist investors, and the media.
The question becomes: Can a corporation effectively do both concurrently? Arguably the answer is yes, in certain circumstances for certain companies (but not all). And that is Mr. Schroeter’s respectable view point.
However, I content that not all companies should pursue the concurrent choice. The consequences of the choice are complex. Equity markets reward either and both choices; but not equally. There is an optimal choice for each company. To illustrate, it may be prudent for:
1. An early stage company to exclusively reinvest capital
(Business-investment weighted choice)
2. An established company to exclusively return capital to investors if it has excess cash setting idle, a distinct competitive advantage, and business investments already deployed (and working)
(Investor-reward weighted choice)
3. An established company to reinvest capital in the business and return capital to investors – if it has excess cash, a distinct competitive advantage, business investments deployed, but it needs to extend its working business investments or fund new growth by reinvesting in new areas
(Balanced business-investment/ investor-reward choice)
Circumstances facing each company vary: profitability, cash available, risk tolerance, reinvestment growth prospects, and market value. The optimal choice for allocating and deploying profits truly depends. Inevitably, some companies will get it right; and some companies will get it wrong.