Companies make money, or at least they try to. But what, exactly, do they do with that money? Read on.
Imagine that the NHL Demolition Co. (ticker: PUCKS), specializing in property destruction, earns $15 million on sales of $120 million this year. There are four main things it can do with that moolah:
- Pay out all or some of its profits to shareholders as a cash dividend. (Matt Richey expounds on the power of dividends in this article.)
- Buy back some of its own shares on the open market. This boosts the value of the remaining shares, as the company's worth ends up being divided among fewer shares. (Learn more about buybacks in this Zeke Ashton article on the buyback yield.)
- Plow that money into its ongoing operations, renting more property to destroy or hiring more destroyers.
- Invest in other business ventures, perhaps buying a smaller demolition company or a related company, such as a recycling enterprise.
A publicly traded company's main priority should be to build value for shareholders. To do that, it must determine which strategies will generate the biggest bang for the buck. Buying back shares, for example, isn't too smart if the shares are currently trading at grossly overvalued prices.
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