Update on Uses of Cash and Subsequent Returns on Share Prices

Transcription

1 Update on Uses of Cash and Subsequent Returns on Share Prices W. Mark Meierhoffer Practice Leader and Senior Consultant

2 Takeaways Understand the build-up of Cash that has occurred Options for Cash usage View some differentiating ways to measure your company on capital rationing decisions If an investor, provide input into equity portion of TAA decision making 2

3 Topics Covered Background S&P 500 Index Overview of Corp America Cash Position Overview of Corp America Uses of Cash Review Proprietary Study Conclusions 3

4 If you think you have arrived, it is time to be shown the door. - Malcolm Forbes 4

5 S&P 500 ( ) 5

6 History of Corporate Cash Balances 6

7 History of Corporate Cash Balances Source: FactSet, Standard & Poor s, J.P. Morgan Asset Management 7

8 Cash Facts (S&P 500 Ex-Financials) Y/E Cash Balances (2015 vs 2014) down 0.5% Only Tech Sector had higher cash balances in 2015 Utilities flat Other Sectors Operating Cash Flows $400 bb in Q4 Free Cash Flows $215bb in Q4 8

9 Macro View of Cash Uses Reinvesting in Business CAPEX R&D M&A Distributions to Shareholders Dividends Buybacks 9

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

11 Investing Cash Flows: TTM Fixed Capital Expenditures 11

12 Research and Development Spending 12

13 M & A 2007 In Trillions Deals* $4.4 $3.2 $4.7 Largest Allergan / Pfizer SAB Miller / A-B In Bev BG Group / R D Shell EMC / Dell DuPont / Dow $148.6 bb $105.6 bb $69.8 bb $66.0 bb $62.4 bb *Source: Thomson Reuters 13

14 Shareholder Distributions 14

15 Shareholder Distributions 15

16 Shareholder Activism Source: FactSet 16

17 Dividend Payout Practices This chart counts the number of companies with trailing twelve-month dividend payments that are above, below, or in-line with payments from the previous quarter. Non-payers are stocks that did not pay dividends in the trailing twelve months or the previous quarter s trailing twelve months. 17

18 Dividend Payout Ratio In examining dividend payout ratios, there are a number of periods where earnings volatility caused payout ratios to change dramatically. This phenomenon can be seen in certain sectors ten-year average payout ratios. For this reason, the sector chart examines median payout ratios. 18

19 S&P 500 Sources of Total Return 19

20 Summary of Buybacks By Year Source: Federal Reserve Board and Standard & Poor s Corporation 20

21 Change in Outstanding Equity Capital Resulting in Issues and Buybacks Source: Federal Reserve Board and Standard & Poor s Corporation 21

22 Buybacks to Free Cash Flow 22

23 Uses of Cash Study Study Definitions 23

24 Uses of Cash Study METRICS: Distributing to Shareholders 1. Dividend Policy (Primarily Increases) 2. Stock Buybacks (Average Annual Repurchases Over Past 5 Years) 24

25 Uses of Cash Study METRICS: Reinvesting in the Business 3. Mergers and Acquisitions (M&A) (Cash M&A/Assets Over Past 5 Years) 4. Research and Development (R&D) (Total 5-Year R&D/Total Sales) 5. Capital Expenditures (CapEx) (Total 5-Year CapEx/Assets) 25

26 Uses of Cash Study Other Metrics Included Does leverage deter returns? What about P/E? Does free cash flow matter? 26

27 Uses of Cash Study Number of Observations by Cap Size Large Cap 4,056 Mid Cap 18,519 Small Cap 19,765 Micro Cap 43,176 TOTAL 85,516 ** Counts are cumulative over the life of the study ( ). 27

28 Uses of Cash Study Cap Size Ranges Large Cap: $20 Billion $2 Billion Mid Cap $20 Billion $600 Million Small $2 Billion Micro: $600 Million 28

29 Style Factors VALUE TO GROWTH SPECTRUM Value Stocks High High High High Low Low Low Low Factor Book - to - Price Book to Price Sales - to - Price Sales to Price Dividend Yield Cash Flow Yield Dividend Growth Asset Growth Earnings Growth Relative Price Strength Growth Stocks Low Low Low Low High High High High 29

30 Study Findings Through

31 Total Returns by Cap Size & Style Three-Year Annualized Returns ( ) Total Universe of Stocks 7.41% Large Cap Stocks 8.07% Mid Cap Stocks 8.96% Small Cap Stocks 8.42% Micro Cap Stocks 5.95% Value Stocks 8.10% Growth Stocks 6.63% 31

32 Dispersion of Returns by Category 10% All Stocks Three-Year Annualized Return Spreads ( ) 8% % % 2% 0% Dividend Increases Buybacks M & A Cap Ex R & D Median 3-Year Return For All Stocks: 7.41% 32

33 Drill-Down on Buybacks By Cap Size & Style By Sector Effect of Leverage on Buyback Programs 33

34 Stock Buybacks Three-Year Annualized Returns ( ) By Cap Size With Buybacks Universe Returns Premium (Discount) All Stocks 8.00% 7.41% 59 bps Large Cap 8.04% 8.07% 17 bps Mid Cap 9.06% 8.96% 10 bps Small Cap 8.84% 8.42% 42 bps Micro Cap 6.32% 5.93% 39 bps 34

35 Stock Buybacks Three-Year Annualized Returns ( ) By Investment Style With Buybacks Universe Returns Premium (Discount) All Stocks 7.73% 7.41% 32 bps Value 8.11% 8.10% 1 bp Growth 8.82% 6.63% 219 bps 35

36 Stock Buybacks by Economic Sectors Three-Year Annualized Return ( ) With Buybacks Sector Premium (Discount) Financials 10.80% 10.86% Utilities Consumer Staples Industrials Health Care Telecommunication Services Energy Materials Consumer Discretionary Information Technology All Stocks with Buyback Activity 10.36% 10.52% 9.03% 8.84% 8.55% 8.15% 8.50% 6.45% 7.81% 6.89% 7.50% 8.20% 7.05% 6.25% 6.33% 6.06% 4.30% 3.39% 7.73% - 3 Year Returns 36 Median 3-Year Return For All Stocks: 7.41%

37 Stock Buybacks Three-Year Annualized Returns ( ) Impact of Debt All Stocks (With Buybacks) 7.73% Top Third (Highest Leverage) 8.69% Middle Third 8.50% Lowest Third (Least Leverage) 5.83% 37

38 Drill-Down on Dividends By Cap Size & Style By Sector Stratify by P/E 38

39 Comparison of Stocks With Dividend Increases vs Total Stock Universe Three Year Annualized Returns ( ) Companies with Dividend Increases 8.85% All Stock Universe 7.41% Premium 144 bps 39

40 Dividend Increases by Cap Size Three-Year Annualized Returns ( ) Stocks with Dividend Increases Universe Returns Premium (Discount) All Stocks 8.85% 7.41% 144 bps Large Cap 8.83% 8.07% 76 bps Mid Cap 9.68% 8.96% 72 bps Small Cap 9.73% 8.42% 131 bps Micro Cap 7.65% 5.93% 172 bps 40

41 Dividend Increases by Investment Style Three-Year Annualized Returns ( ) Stocks with Dividend Increases Universe Returns Premium (Discount) All Stocks 8.85% 7.41% 144 bps Value 9.10% 8.10% 100 bps Growth 8.62% 6.63% 199 bps 41

42 Dividend Increases by Economic Sectors Three-Year Annualized Return ( ) With Dividend Increase Sector Premium (Discount) Financials Health Care Utilities Energy Industrials Consumer Staples Telecommunication Services Materials Consumer Discretionary Information Technology All Stocks with Dividend Increase 11.20% 10.86% 10.82% 6.45% 10.69% 10.52% 10.66% 8.20% 9.52% 8.15% 9.24% 8.84% 8.52% 6.89% 7.65% 6.25% 7.37% 6.06% 6.93% 3.39% 8.85% - 3 Year Returns Median 3-Year Return For All Stocks: 7.41% 42

43 10% Level of Dividend Increases Three-Year Annualized Return Spreads ( ) 9% 8% % 6% 0% Median 3-Year Return For All Stocks: 7.41% >0% to 10% >10% to 25% >25% 43

44 Dividend Increases Stratified by Price Earnings (P/E) Ratio Three-Year Annualized Returns ( ) Stock Style Highest P/E Middle P/E Lowest P/E All Stocks 7.04% 9.86% 11.12% Growth 6.89% 9.51% 10.56% Value 7.46% 10.37% 11.66% 44

45 Free Cash Flow Does Free Cash Flow Make a Difference? 45

46 Returns Free Cash Flow / Assets (Results for All Stocks) Returns By Use Of Cash Category Annualized Three-Year Returns ( ) 11.0% Top Tertile 10.0% 9.0% 8.0% 7.0% 10.1% 9.2% 7.3% 8.9% 8.5% 8.7% 8.1% 8.3% 7.9% Middle Tertile Bottom Tertile 7.9% 7.6% 6.0% 5.0% 4.0% 4.6% 3.0% 3.4% 3.4% 2.0% 1.0% 0.0% 0.7% -1.0% Dividend Increases Buy Backs M&A CapEx R&D 46

47 Conclusions In general (when ranking 4,000+ Stocks) Increasing dividends best use of cash Maintaining dividends second best use of cash Share buybacks in third place High free cash flow equates to better total returns 47

48 Conclusions, cont d Higher leverage does not appear to negatively impact returns We are not advocating one use of cash strategy over any other; Need to balance between reinvesting in the business and rewarding shareholders. 48

49 Conclusions, cont d Alternatives to Capital Rationing Thought Process Expand your competitive universe to include your Competitors for Capital Cap Size Larger companies perform differently than smaller companies By Style Growth companies Value companies Further peel back onion What is my company today What will my company look like in three years 49

50 Questions? 50