Capital allocation shows firm’s priorities
Q: What’s a company’s “capital allocation”? — B.R., Sioux City, Iowa
A: The term capital allocation refers to how a company spends its money. For example, it can pay down its debt, pay its shareholders a dividend, buy back some of its shares, buy another company or use it to further its growth, such as by hiring more workers, building a plant, spending more on advertising, and so on.
The money should be spent in the most productive ways, so companies need to avoid spending too much on an acquisition or buying back shares when they’re overvalued. When a company’s capital is not allocated effectively, it’s wasted, and that hurts shareholders. a lump sum) beginning immediately or in the future. Variable-annuity payouts rely on the performance of an underlying security or the stock market; simpler fixed annuities offer specified payouts, with less mystery, and are often preferable.
When you’re being pitched a variable annuity — and that’s often how they’re sold, by salespeople pushing them — you’ll be told of their benefits, which will sound terrific. For example, you can receive income for the rest of your life, reducing or eliminating your risk of running out of money before you die. The annuity is taxdeferred, so your money grows without being taxed and is taxed when you withdraw funds. You often can include a “death benefit,” choosing a beneficiary to receive a certain sum should you die before you receive all guaranteed payouts, or if your account’s balance is above a certain level.
Those are all good, but you can get the same or similar benefits from less-problematic annuities, such as fixed and/or immediate annuities.
Because variable annuities let you choose how the money in your account is invested — conservatively, aggressively or somewhere in between — you can end up with exceptionally good results, but only if the investments perform as you hope. Many investors end up receiving less from the annuity than they’d hoped.
Variable annuities are also problematic because they often feature steep fees and costs. Even seemingly small fees can eat into your return, making a big difference in the long run. A variable annuity is likely to charge you fees for mortality and expense risk in addition to general administrative fees. Variable annuities charge “surrender” fees, too, which can be substantial.
Learn more at sec.gov/ investor/pubs/varannty. htm before investing in a variable annuity — and consider opting for a fixed annuity instead. Foolish trivia:
Name that company
I trace my roots to the 1920s. I’m dominant in cable TV, with HBO, Cinemax, CNN, TBS, TNT, Adult Swim and the Cartoon Network. One of my divisions is the world’s leading producer of television programming and filmed entertainment. Video games such as “Mortal Kombat X” and “Batman: Arkham Knight” are also mine, as is the new “LEGO Dimensions.” My former businesses included magazines (such as People and Sports Illustrated), hardcover books, comic books, recorded music and even AOL. My market value recently topped $75 billion, and I employ around 25,000. AT&T is aiming to buy me. Who am I?
Last week’s trivia answer
I trace my roots to 1911, when my founder, a hunter frustrated with cold, damp feet, designed a boot with a rubber bottom and a leather top. Who am I? (Answer: L.L. Bean)