Smart, wealthy shareholders love cash hoarding. Especially if the cash is held tax free in overseas accounts.
The share price is boosted allowing them to get returns in the form of pure capital gains.
If the company were to pay dividends, sure, most of those dividends would be taxed at capital gains rates as well. But that money has to be taxed at the highest US corporate income tax rate first. Thus, significantly reducing overall value.
To go a step further, the wealthy don't even have to cash out their shares as the price climbs and climbs. They can get low interest loans using the shares as collateral. This deferring taxes indefinitely and leaving all their capital in these huge companies that are outperforming the SP500 anyway.
And another point: you have to imagine that the richest companies in the world have the best possible financial expertise on staff. It is safe to assume they know what they are doing.
"It is safe to assume they know what they are doing" because they're managing a ton of money has been proven wrong over and over again.
What they do certainly have is more information and expertise than a random internet commenter. They don't know everything, but it's safe to assume they know more than you.
Any evidence to back this up? Activist investors generally pressure companies to not hoard cash, for exactly the reasons outlined earlier. Example: http://money.com/money/3484599/icahn-letter-apple-cash/
"Icahn controls 53 million shares of Apple, worth $5.3 billion, which gives him about a 0.9% ownership in the company. In his letter, Icahn lays out his reasons that Apple should repurchase its own shares"
Companies can return money to investors using share-buybacks - this avoids any taxable event for investors, while also not suffering from the downsides of hoarding cash.
There is one significant tactic where it makes sense to hoard cash temporarily - keeping it overseas while waiting for a tax holiday or a reduction in the tax rates. This only works as a temporary tactic though. If any company announced that they were going to hoard cash over a long period, it would depress the share-price significantly. This is exactly why activist investors like Icahn pressure their companies to reduce their cash hoards.
Shouldn't they be buying back their own shares?
noego's point is that that $100MM might be more valuable if freed up to invest in a risk-asset, but not that is has no value whatsoever.
[1] https://advisors.vanguard.com/VGApp/iip/advisor/csa/investme...
The corporation will have to repatriate the money and pay corporate income tax on it before they give you your dividends.
Alternatively, they could just grow that hoard of cash and let your stock appreciate after which you can sell a few shares and get capital gains rates on capital that didn't have to be double taxed.
(It's 90 days for preferred shares.)
Edit: *qualified dividends
No, ordinary dividends are taxed as income.
And in case a superinflation strikes, all those loans are effectively wiped out while they keep the assets (the corporate off-shore hoard might suffer as well though, but it might be sufficiently mobile and well-managed to avoid the worst). If capitalism was a video game, it would get terrible ratings due to utterly botched difficulty scaling.
If you have $10B in stock, you probably aren't going to borrow so much as to even get close to a margin call in a market downturn.
This is actually wrong.
Apple alone wholly owns one of the world’s largest investment funds - Braeburn Capital - that actively manages over $270b of Apples assets leveraging very sophisticated investment strategies.
The extent to which managing its cash is now a value-add part of Apple’s business is well outlined in the tongue-in-cheek article from WSJ “Apple Is a Hedge Fund That Makes Phones”
https://www.google.com/amp/s/www.wsj.com/amp/articles/apple-...
https://www.wsj.com/articles/apple-is-a-hedge-fund-that-make...
> “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
The thing here is you have to be confident in your ability to deploy capital during those downturns. Your average expected return over multiple cycles (cash returns mid/late cycle + opportunistic investments beginning of cycle) needs to be higher than broad equity returns.
This is absolutely true, but sort of misses the point. What happens in practice is that such stocks end up being disfavored and investors prefer to buy other securities with better dividends. Which has the effect of depressing the share price. Which has the effect of making it harder for the company to raise money via issuing debt or stock.
...which the company doesn't care about in the first place, because it's sitting on a truck load of cash and doesn't need to raise money.
Honestly, the jury is very much out on whether or not this kind of behavior is bad for companies in a micro sense. Really all it means in practice is that these companies haven't been able to find a way to invest this money productively, they're out of ideas to purse, or markets to expand into. And that's bad, but it's not bad because of cash.
In a macro sense, though, the argument is clearer: all that money sitting around doing nothing (well, nothing but sitting around in safe investments) does nothing for the GDP as a whole, and in particular it does nothing for the bulk of the population with little to no investment holdings.
Curiously, GOOG and AAPL are two of the many large companies who have large cash hoards who are themselves part of the S&P 500.
What would you pay for one of those shares? Nothing, right? The company is worthless.
Now imagine that same company has a bank balance of $100. Each share now also owns a 1% share of the bank balance (because it owns 1% of the company itself). How much would you pay for such a share? Anything below a dollar seems pretty good to me!
In other words, the more valuable assets the company holds, the more we'd be willing to pay for shares of the company, all else equal. This is called the 'book value' of a company and is total assets - intangible assets (patents, goodwill) and liabilities.
Note that the real-life situation is slightly more complex because you can't always get at the assets, even if you buy the shares for cents on the dollar. But the general idea is that you can buy shares until you have enough voting rights to dole out the cash as dividends.
For big public companies, it's the opposite. If a company wants to fundraise 10% of its market-cap, either for an acquisition or major investment, it doesn't require nearly as much effort. It can issue new shares, and immediately sell them to investors the next day for cash. The hard part is finding profitable investments, not raising the funds to make it happen. Hence why there's little competitive advantage in hoarding cash.
On the flip side, having a big cash hoard is bad for your investors' returns. It bloats your market-cap, without having any impact on earnings. This means that your P/E ratio is now inflated, and your earnings yield is reduced. From an investor's perspective, if you have invested $100 in the company, you're only only getting back $6 in profits every year, not $7 or $8.
Another way to look at this, is that Google/Apple invest their cash hoard very conservatively, in things like short-term treasuries, because of which their returns are very low. Whereas most of their investors would far prefer to invest the money in investments that produce better returns, such as the S&P 500. By not returning the cash hoard to its investors, Google is essentially forcing them to make low-return investments that they would never make otherwise. Of course, investors aren't going to be happy with this, and they will retaliate by lowering their valuation of GOOG stock, thus depressing the share price.