Capital Allocation Evidence, Analytical Methods, and Assessment Guidance

About this book

Capital allocation is a senior management team’s most fundamentalresponsibility. The problem is that many CEOs don’t know how to allocatecapital effectively. The objective of capital allocation is to build long-termvalue per share.Capital allocation is always important but is especially pertinent todaybecause return on invested capital is high, growth is modest, andcorporate balance sheets in the U.S. have substantial cash.Internal financing represented more than 90 percent of the source of totalcapital for U.S. companies from 1980-2015.M&A, capital expenditures, and R&D are the largest uses of capital foroperations, and companies now spend more on buybacks than dividends.This report discusses each use of capital, shows how to analyze that use,reviews the academic findings, and offers a near-term outlook.We provide a framework for assessing a company’s capital allocationskills, which includes examining past behaviors, understanding incentives,and considering the five principles of capital allocation.