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How should companies spend excess cash?

Key Points
  • Are buybacks in the best interest of shareholders?
  • Should companies raise their dividend instead?

In its earnings report this week Apple announced its cash hoard swelled to a record $256.8B in the second quarter.

The Cupertino-based company also disclosed plans to add an additional $35B dollars to its stock buyback program, bringing the total projected payout to $210B by March 2019. ('Projected' since the company is under no obligation to pay out the amount in full.)

A customer uses cash to pay for Apple iPads at the Apple store on 5th Avenue in New York.
Apple's cash hoard swells to record $256.8 billion

While Apple's cash stash is an extreme example – it's now larger than the market cap of General Electric – it does beg the question of how companies should be spending their excess reserves.

In the short-term buybacks can often lift a company's stock price. Once the company repurchases stock, there are fewer shares outstanding, which, in turn, lifts earnings per share.

But according to financial consulting firm Fortuna Advisors, it might not always pay out in the long-term.

Tim Cook with Apple employees
Apple now pays the biggest dividend in the world, surpassing Exxon's payout

Looking at returns from 2011-2016, Fortuna found that companies that had completed buybacks rose, on average, 11.2%.

Double digit gains certainly should not be ignored, but in the same time frame the broader market did better, returning 14.6%.

So, with other options available, such as dividend hikes and investment in R&D, are buybacks a good move for companies?

The "Halftime Report" traders weighed in.

Buybacks: A short-term fix that's bad in the long run?