Question

According to John Connors, former CFO of Microsoft, how does a company decide whether to increase its dividend, have a special dividend, or repurchase its stock to return capital to investors? Be DETAILED in your answer 3

Answer 1

According to John Connors, former CFO of Microsoft, a company decides whether to increase its dividend, have a special dividend, or repurchase its stock to return capital to investors by determining which of the above three distribution methods will increase the value of the firm. Many firms use all of these methods, although at different times. Connors says that the method that is eventually selected depends on the company’s expectations with regards to its future earnings and its cash flows. Companies also consider prior share price performance data when deciding on the type of distribution method to use i.e. whether to increase its dividend, have a special dividend, or repurchase its stock to return capital to investors.

Usually companies repurchase its stock to return capital to investors when they want to distribute their non-recurring cash flows (which are also known as lumpy cash flows). This logic also applies when companies pay a special dividend. When firms have recurring excess cash flows then they usually opt for paying increased dividends. So if managers in a company anticipate more than average cash flows in future and that too on a sustainable basis they will most likely increase its dividends.

John Connors says that companies generally want to keep sufficient cash on its hand so that they have the flexibility to manage unusual situations and scenarios like a short term economic dislocation or the availability of an investment opportunity that the company would like to chase.