Determining the best way to reinvest a corporation's profits is not an easy task. Naturally, stockholders want management to maximize returns, but without a crystal ball to predict the future, choosing the best way to allocate earnings can be uncertain to say the least.
While some software companies like SAP (NYSE: SAP ) and CA Technologies (Nasdaq: CA ) have chosen to pay part of their booty out to shareholders in the form of dividend payments, highly profitable financial software provider Intuit (Nasdaq: INTU ) has taken to acquiring other businesses to grow its income. However, is Intuit's strategy best for its shareholders?
It's hard to argue with the results thus far. The company's stock has been on a tear this year (up more than 60%), as it continues to grow its revenue and increase earnings. From all appearances, it seems that past reinvestment decisions are paying off handsomely.
However, this doesn't tell us much about recent acquisitions, as Intuit offers a variety of products and services. Its latest purchases include Mint Software, an online personal finance service provider, and Medfusion, an online health-care solutions provider (both are part of Intuit's "other businesses" segment). In total, management shelled out $259 million for the two acquisitions. That's roughly 45% of fiscal 2010's earnings. Clearly, it was expecting big things from this large outlay.
Looking at recent quarterly results, it seems that it will be awhile before shareholders see a substantial payoff from Intuit's latest purchases. Analyzing the most granular data provided, the "other businesses" segment, which includes its popular Quicken software as well as its recent acquisitions, only added $1 million to operating income for the quarter. It should be noted that at the time these deals where made, it was expected that they would have little impact on earnings in 2011. So investors will have to be patient before seeing the results of the $259 million it shelled out to grow this segment.
Though Intuit has had great success recently, its future depends on its ability to make good decisions with its profits. It's still too early to declare the latest acquisitions as bad deals, but Intuit stockholders must continue to monitor the situation and contemplate if they would be better off with potential dividend payments or more stock buybacks in lieu of the company's growth strategy.
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