Free cash flow to equity and cash payout policy in top ten technology companies in the U.S.

ABSTRACT: This thesis investigates the relationship between the free cash flow to equity (FCFE) and the total cash payout for the top ten most valuable technology corporations in the U.S.A. over the period 2002-2012. Shareholders are interested in the difference between FCFE and total cash payout since they can have a better estimation about the performance of the corporation and estimate the amount of available cash in the company. The difference between these two parameters is reflected in the sum of cash and retained earnings. This study concludes that apart from the two exceptional corporation, AT&T and Verizon, payout policy has been following the FCFE trend in the last decade. However, cash payout trend has been fluctuating smoother than FCFE. AT&T and Verizon are the two telecommunication corporations that have been acting differently due to the FCFE and cash payout trends. That is because of the high level of risk involves in this industries. Moreover, AT&T and Verizon has huge amount of tangible assets which results in high depreciation each year. This is in line with the fact that dividend policy is sticky and managers are reluctant to change the level of dividend. Technology corporations also acted more conservatively after the global 2008-2009 crisis. The corporations paid less than their FCFE to their shareholders on average after 2009 which resulted in a huge difference between FCFE and cash plus retained earnings. The study also concludes that the corporations decided not to distribute cash to shareholders resulting in a substantial difference between FCFE and cash plus retained earnings for two main reasons; 1. To increase their flexibility for future investments and acquisition. 2. To get prepared for the next possible crisis. iv Keywords: Free cash flow to equity (FCFE), Payout policy, Dividend policy, Share repurchase, Stock buybacks, Technology corporations, U.S.A. …………………………………………………………………………………………………………………………………………………………………………………………………………