Constellation Software is a company with an
incredible long-term track record. Its founder and CEO, Mark Leonard, writes in his shareholder letters that a company should not hoard capital unnecessarily. I completely agree. Money that a company cannot effectively invest should be returned to shareholders as soon as possible.
Capital hoarding dilutes returns
Here is an illustration of why capital hoarding dilutes returns. Let’s say there are two companies: Company A and Company B. They will each generate $1 in free cash flow per share per year for 10 years before they cease operating. The difference is that Company A returns all its annual free cash flow to shareholders each year while Company B hoards its cash. Company B also earns negligible interest, and only returns all of the cash to shareholders in one go at the end of 10 years. With the above as a backdrop, Company A’s shareholders...