Capital allocation is the process by which a company's management allocates resources to the business. A shareholder-friendly management will consider, for each dollar earned by the business, the best means of applying that cash on behalf of shareholders.
Primary mechanisms for capital allocation include: paying dividends, purchasing shares on the open market, investing in growth or sustaining operations of the business.
In deciding between these mechanisms, management must consider a wide range of factors: the current stock price, the expected return on equity, tax rates to shareholders, and opportunities for business growth.
See Also: dividends, share repurchase
