NEW YORK (TheStreet) -- Activist investors have been pressing U.S. companies to return extra cash to shareholders through dividends or stock buybacks, and companies have been obliging them.

Surely, individual investors may be asking themselves, "Is this really the best use of excess cash?" Reality Shares decided to investigate, and the results might surprise you.

Many investors consider stewardship of a company's free cash to be one the most important responsibilities of corporate management. For public companies in particular, the guiding principles to effective cash governance should all directly or indirectly enhance shareholder value. With this in mind, there are only four principal uses of free cash: direct reinvestment in the business for organic growth; accretive growth through acquisitions; paying down debt; or returning cash to shareholders through stock buybacks and/or dividends.

A company's stock price is ultimately driven by the successful deployment of its free cash. In this regard, earnings, the price-to-earnings ratio and aggregate dividends become key measures of a company's effective use of its corporate cash. In a perfectly managed corporate model, a company would always deliver a return on invested capital above its cost of funding. Corporations would only deploy free cash as working capital so long as they could earn returns over and above this target invested rate of return. Unfortunately we don't live in a perfect world. Many companies have inferior returns on invested capital, sometimes far below their cost of capital for sustained periods of time.

Increasingly, activist investors are combing through corporate income statements to identify these companies and seek changes in how they are run, often by compelling them to return more cash to shareholders in the form of dividends or buybacks.

The trend was illustrated in a May 27 article in The Wall Street Journal titled "As Activism Rises, U.S. Firms Spend More on Buybacks Than Factories," which called into question whether reduced capital investment might negatively affect economic growth.

The Journal said an S&P Capital IQ analysis conducted for the newspaper showed that companies in the S&P 500 index doubled their spending on dividends and buybacks to a median 36% of operating cash flow in 2013 compared to 2003. "Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003," the Journal said.

Few would argue against companies investing in their businesses to create innovation, growth and jobs, but what if every dollar invested is destroying shareowner value? Reality Shares conducted an analysis of the S&P 500 to determine which companies are doing exactly that.

First, the return on invested capital for the nonfinancial companies in the index was examined, to gauge how effectively companies are investing shareowners' capital. Then the returns were compared with the companies' weighted average cost of capital, a gauge of how much companies must pay for their equity and debt capital. The results show which companies are generating returns in excess of their cost of capital -- in other words, whether they are creating shareholder value or destroying it. We used five-year average figures to portray a longer-term view.

As an initial screen, Reality Shares examined whether the universe of S&P stocks generate returns that exceed a common WACC benchmark. While the cost of capital is different for every company, each company's returns were compared against a modest 5% WACC to evaluate the number of companies that would better serve their shareholders through the return of free cash in the form of increased dividends than through other forms of cash deployment.

Reality Shares' research shows there are a significant number of companies in both the S&P 500 and Nasdaq 100 indices with ROIC values of 5% or less over the past five years. Looking at nonfinancial companies that were constituents of the S&P 500, 132 of the 414 companies (or 32%) have an ROIC below 5%, while 17 of the 107 companies (or 16%) that were constituents of the Nasdaq 100 over that period also do not exceed a minimum 5% ROIC threshold. In fact, in the S&P 500, 29 companies have posted a negative average ROIC over the past five years.

The following charts break down the sector distributions of the S&P 500 and Nasdaq constituents with ROIC values of 5% or less, including the proportion of companies in that sector with sub-5% ROIC. For example, all 30 utilities companies (or 100%) in the S&P 500 have generated an average ROIC of less than 5% over the past five years.

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In addition, Reality Shares analyzed all the companies in the S&P 500 and Nasdaq 100 to find the firms with the lowest ROIC relative to their WACC. The chart below shows the five worst-performing companies that currently pay a dividend, and the five worst-performing companies that do not currently pay a dividend. All of the firms are generating a negative ROIC. (For the complete list, contact Reality Shares.)

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For those companies lacking attractive, organic capital investment opportunities, that leaves three options to deploy their free cash: acquisitions; paying down debt; or returning capital to shareowners. With both interest rates and credit spreads at historic lows -- and even negative in some cases -- paying down debt is probably not an attractive option for most companies at this time.

Buybacks and acquisitions have both been at or near historic highs recently. In a recent research report from Goldman Sachs' equity strategy team titled "What managements should do with their cash (M&A) and what they will do (buybacks)," the researchers cite U.S. equity valuations that "look expensive on most metrics" and a poor track record by management teams in timing stock repurchases. They then make the case that "firms should focus on M&A rather than pursue buybacks at a time when P/E multiples are so high."

But it's unclear why acquiring other companies' shares at historically high price-to-earnings ratios will be a better investment than acquiring their own shares at historically high multiples. Additionally, there are considerable risks inherent in acquisitions and integration.

That leaves what Reality Shares considers to be the most attractive option for shareowners: dividends.

In an age of activist shareholders where investor returns are continually being scrutinized and challenged, the debate between returning value directly to shareholders vs. re-deploying capital in the business is hotly contested.

When considering the best use of a company's free cash flow, corporate management in many instances would better serve shareholders through increased dividend payments vs. less-attractive investment options where shareholder returns are not being maximized.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.