Wise Use of Retained Earnings

SPLITTING COMPANY PROFITS

When a corporation makes a profit, it can spend that profit in two ways:

a) return the profits to stockholders by way of dividends, share buy-backs or bonus issues;

b) use the money to increase the profitability of the company

For example, a company makes a profit of $100. 

• It can pay this entire amount to stockholders who can then use that money as they think fit – spend on consumer items, make further investments, whatever. 
• Or the company can use all that profit to invest in the business with a view to increasing profits in future years. 
• Or the company can do a bit of both.

WISE USE OF RETAINED EARNINGS INTERESTS WARREN BUFFETT

To Warren Buffett, the ability to use retained earnings wisely is a sign of good company management. If the company management cannot do any better with earnings than he can, then he is better off if the company pays him the full amount in dividends.