Public companies are about to be flooded with cash, how will they spend it? – Robert Pozen and Robert Steel

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Fortune

U.S. companies will soon experience a tsunami of free cash flow. Because of the new Trump-GOP tax plan—the Tax Cuts and Jobs Act—we estimate American companies will have over $2.6 trillion of additional cash over the next five years. This will come from three sources: repatriated overseas cash, future foreign earnings, and lower corporate taxes on domestic profits. The critical question is: What will companies do with this inpouring of cash?

For years, many CEOs of public companies have complained of pressure by analysts and activists to focus on short-term profits rather than long-term growth. Now each CEO has a great chance to put their money where their mouth is.

CEOs have two main alternatives for this incremental cash flow; they can boost short-term returns to shareholders through higher dividends and share repurchases, or they can augment long-term growth by investing in plants, people, research, and technology acquisitions.

For the sake of their credibility and the American economy, we urge CEOs to invest in long-term growth, and not in share buybacks as they did in 2004.

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