Growth companies and dividends
The reason growth companies don't typically declare dividends is that they need to reinvest their profits into more factories and newer equipment or more locations and expanded inventory. They grow by increasing their output thereby creating more sales. IDCC is not a typical growth company. They absolutely need to continue to create intellectual property however they are successfully accomplishing that at current spending levels. Therefore they are and will be generating a great deal of free cash flow that is not required for them to grow the company.
The question is how should the use this cash to best enhance shareholder value. If they can acquire marketable patents at a good price that would be an excellent use of the cash. If there are no good opportunities found, then I like continued buybacks, which will provide EPS growth by making the EPS denominator of shares lower. I agree with Tom Carpenter that buybacks should be tactical, but since I view IDCC to still be significantly undervalued, I believe purchases at these levels to be wise ones. I also believe a regular dividend would add value as it would attract a whole new segment of the investment community. I don't like the one time dividend. Company declares dividend, pays dividend, stock falls by amount of dividend, we pay taxes and there is nothing to draw new investors. Buying a company is scary to me because successfully managing a business is far different than understanding the value of a company you want to acquire. Many a great company has spent their big profits on companies that ended up being busts. I like the couple of small moves that IDCC has made. Relatively small outlays that had limited risk and were complimentary to the business model. If IDCC does look at acquisitions my hope is that they are ultra conservative and stay well within their comfort zone. I sincerely hope that IDCC exits the product side completely. I love the IP royalty model. Producing products in a intensely competitive market is a tough way to make money. The worst use IMO would be just to sit on the cash. Keep a comfortable amount of liquidity to handle any reasonable contingency, but put the rest to use. Very low interest rates and a lack of absolute safety (if the banking system has failures, IDCC's cash would largely be beyond insured amounts) make it an unattractive choice to me.
The purpose of this discussion is not to try to tell management what to do, it is to help us understand how the strategy the company selects may affect the future share price so we can make our investment decisions. I'm very interested in how others view the potential choices.
