NDI Executive Exchange

Transcription

1 National Directors Institute NDI Executive Exchange DI The New Normal An Interactive Exchange About the Future of Governance Board Oversight of Capital Allocation Strategies Co-Sponsors In-Kind Sponsors

2 Capital Allocation Considerations November 213.pptx\7 NOV 213\1:31 PM\1 Capital Allocation Considerations National Directors Institute November 213

3 Spectrum of Capital Allocation Alternatives Reinvest in core business and / or direct capital to new product lines Improve margins and generate higher sales on similar capital base Organic Growth Higher Returns Acquisitions Little upside (5-1 bps max return) Reduce capital base and generate incremental returns on earnings Repay Debt Current WACC Share Repurchase / Dividend Deploy capital into transformational and / or bolt-on acquisitions Generally more costly growth vs. organic Keep Excess Cash Return excess capital to shareholders, assuming capital is redeployed with similar cost financing Lower Returns 2

4 Global M&A Volumes Still At Low Levels 9M 213 up 1.2% vs. 9M 212 thanks to Verizon / Vodafone Deal Dollar Volume (1) (2) Average Transaction Size $ Bn $ MM 4,5 1,35 4, 3,987 1,2 3,5 3,385 1,5 3,166 3,33 3, 9 2,5 2, 1,5 1, 5 2,531 2,482 2,287 2,286 2,299 1,765 1,728 1,449 1,519 1,24 1, ,198 2, % 1,512 1, YTD No. of Transactions ,244 1,615 2,229 2,419 2,795 3,19 1,988 1,814 1,993 2,384 2,956 3,573 4,288 2,994 2,214 3,1 3,181 3,169 2,146 (2,861) (3) Actual 9M Annualised Avg. Transaction Size (Smoothed) Source Thomson Reuters as of 3 September 213 Notes 1. Includes announced transactions, each with an aggregate value of $1 MM or more. Includes transactions with estimated values. Excludes terminated transactions. Future terminations of pending transactions will reduce totals shown 2. Includes transactions announced as of 3 September Actual (Annualized in bracket) 3

5 Survey Highlights: 91% of investors think corporate cash balances are high, with 63% advocating a greater amount of return of capital to shareholders The majority of investors feel that regular dividend or large share repurchase program initiations are not a signal that other growth opportunities are lacking Investor Return of Capital Survey Summary 212 Morgan Stanley Survey of 117 Institutional Investors Investor Views of Corporate Cash Balances Preferred Method of Return of Capital 8% 6% 4% 2% % 63% Too High; Return Capital 28% High but Appropriate; No Return of Capital 2% 7% Not High Other 6% 45% 3% 15% % 39% Combination of regular dividends and share repurchase 29% Regular dividends 21% Share repurchase 11% Special dividends Source Morgan Stanley Proprietary Survey Source Morgan Stanley Proprietary Survey Best Use of Excess Capital Ranked from Highest Priority (1st) to Lowest Priority (4th) (%) Dividend / Repurchase Signal Lack of Growth? (%) Organic growth Dividends Share repurchases 1st 2nd 3rd 4th M&A Regular Dividend Yes No Repurchase Program Source Morgan Stanley Proprietary Survey Source Morgan Stanley Proprietary Survey 4

6 Corporate cash balances are near record highs Corporate Cash % of Assets S.D.: S.D.: Median: In February 213 alone, US corporations announced plans to buy back $117.8 billion shares, the highest monthly total in records dating back to 1985 Structured Share Repurchase activity in 213 is on pace to be up 75% at a record $63Bn S&P5 companies are expected to pay $3 billion in dividends in 213 surpassing $282 billion in 212 Trends in Return of Capital Unprecedented Return of Capital and Growing Cash Balances 1 Over $68BN was returned to shareholders in , % 57% % 43% 61% 57% Repurchase Dividend $Bn with more than $35BN returned via structured share repurchase $3 Bn 75% increase $35 Bn $36 Bn $63 Bn $Bn of buybacks Annualized $Bn Repurchased 3 and more companies paying dividends than ever before Buyback announcements have grown to historical highs in 213 Notional ($ Bn) Cons. Staples Cons. Discretionary Energy 82 Financials 98 Healthcare 56 Industrials 89 Info Tech 36 Materials Telecom Utilities Av. S&P Notional ($Bn) 3-Year Monthly Average Note US-listed, excludes OTC companies 5 4

7 Historically attractive rates and equity valuation coupled with a constructive operating environment contributed to outsized repurchase amounts in Using the same metrics, the return of capital decision is even more favorable today as: Repurchases magnify longterm shareholder returns through a net increase in leverage Excess capital incurs a high carrying cost given de minimus investment yield PE Ratios are at trough levels Debt financing costs are well below those pre-crisis Corporations hold record cash on the balance sheet while generating positive free cash flow Historical US Corporate Share Repurchases Share Repurchase Activity vs. S&P NTM PE and 1-Yr BBB+ Industrial Index Since 22 Aggregate Notional ($Bn) S&P NTM PE 64 4 P/Es Low P/Es Lower Debt Cheap Excess Cash Good Business Outlook Debt Cheaper More Excess Cash? Business Outlook Disclosed / Annualized Aggregate Notional S&P NTM P/E 1-Yr BBB+ Industrial Index Annual S&P Mean Source Capital IQ Notes 1. Annualized Aggregate Notional based on 212 1H percentage of annual total BBB+ Index

8 Activists will often cite one or more themes as cause for undervaluation and rationale for change Targets tend to have: Share price performances that have lagged peers Poor operating performance Lazy balance sheet Return of capital lagging peers Business not having return on capital exceeding WACC Sub-optimal governance considerations Activist Shareholders Who is Targeted? Target Goal Selected Examples Underperforming Companies Change in Management/ Board Pershing Square / Canadian Pacific Carl Icahn / Forest Laboratories Pershing Square / Procter & Gamble Sale of Company Icahn / Amylin Pharmaceuticals Icahn / Clorox JANA / CNET Overcapitalized/ Cash-Rich Situations Return Cash to Shareholders Greenlight / Apple Starboard Value / AOL Transocean / Icahn Diversified Companies Divestitures/ Break-Up JANA / Agrium Relational / Timken Pershing Square / Fortune Brands M&A Related Defeat M&A Transactions/ Increase Merger Price Relational Investors / Charles River Elliott Management / Danisco Starboard / Smithfield Foods 7

9 Capital Allocation Considerations November 213.pptx\7 NOV 213\1:31 PM\8 Disclaimer We have prepared this document solely for informational purposes. You should not definitively rely upon it or use it to form the definitive basis for any decision, contract, commitment or action whatsoever, with respect to any proposed transaction or otherwise. You and your directors, officers, employees, agents and affiliates must hold this document and any oral information provided in connection with this document in strict confidence and may not communicate, reproduce, distribute or disclose it to any other person, or refer to it publicly, in whole or in part at any time except with our prior written consent. If you are not the intended recipient of this document, please delete and destroy all copies immediately. 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