acummulating cash

Hi, I ran across a problem in my financial model and i would like to hear your oppinion on it. i had several stocks where i’ve built a model, but with the announced capex and dividend yield from the company i get to acumulate a lot of cash in time, sometimes half of total assets. it just builds up in the cash flow statement if the company is profitable in the explicit period. how do you solve such an issue? have you encountered something similar? any advice would be appreciated. thanks.

Think about what the company would do if they found out they were generating excess cash and then plug that into the model. Typically, your options include: 1) Increasing capex if there are sufficient organic growth opportunities 2) Making acquisitions if there are attractively valued targets 3) Increasing the dividend 4) Buying back stock 5) Paying down debt Most management teams will happily discuss and rank these options in order of priority when you meet with them. If you do not have access to management, then take your best guess.

Agree with Tobias…A couple of ways of doing it are to look at perhaps historical payout, etc. Then based on your modeled EPS you can increase the dividends (or you can look at past increases as well). All of the things Tobias mentioned are where it would go, but the hardest one to value (IMO) would be an acquisition a few years out…and in some of the companies I have built, the acquisition has been a part of the growth so it is a necessity to not include something from a cash flow perspective.

Agree with Tobias, but one thing you should do with cash which you likely would not have to discuss with management is pay down revolver (which would reduce future interest expense). What to assume for the rest is really based on management’s policy. You can look through old earnings call transcripts to get a sense of what management’s intention is. This question was surely asked by an analyst on a call at some point.

thanks guys, probably increasing the div yield would be a solution. the fact is that i have asked mgmt on occasions, and they just seemed unaware to share a solution to the cash pile. if it’s just lack of strategy, or unwilingness to share, i have no clue. it’s up to me to consume that cash in the model. acquisition seemed a little bold to me, it’s difficult to asses such an opportunity and to include it in the model. debt levels were low, increasing capex did not fit their LT strategy. so i grossly increased div yield… don’t know if it’s feasible though but i guess tobias pointed out the relevant choices

I think buybacks would be a part too. They are anti-dilutive to existing shareholders (and mgmt could be shareholders, naturally) and there aren’t the tax consequences of dividends.

I think that was #4 on the list…

yeah, thanks for mentioning it frisian, i should think about that too. in fact one of the companies has an ESPP rolling, so maybe buyback would prove even better

kevinf12 Wrote: ------------------------------------------------------- > I think that was #4 on the list… Yes, I saw that. But the original poster later indicated that he was going to focus on an increase in the dividend in his model, and I just wanted to point out that buybacks also benefit shareholders. Grinold-Kleiner and all that - thanks Level III!

Of course might not see a net decrease in shares since lots of companies buy back to cover the dilution…

true but if a company is generating massive amounts of excess cash and doesn’t have attractive investement options i’d say buybacks are likely to outweigh employee issuance significantly.

Depending on the integrity of the mgmt…seems like those that have 5-10% dilution dont usually ended up buying more than needed…obviously, each situation is different.