Institute for Business in Society. Views from the C-Suite: Cash Strategies: The When/How/Why of Deploying Capital

Transcription

1 Institute for Business in Society : Cash Strategies: The When/How/Why of Deploying Capital by Kenneth M. Eades Paul Tudor Jones Research Professor of Business Administration

2 by Kenneth M. Eades Paul Tudor Jones Research Professor of Business Administration The Darden Institute for Business in Society (IBiS) held its Strategic CFO Roundtable on 20 June 2013, in Arlington, Virginia, just one day after the Federal Reserve Chairman announced the targeted phase out of its quantitative easing program. The markets reacted negatively to this stimulus reduction as the 10-year Treasury yield rose and the Dow closed down 206 points for the day. Moreover, as the Roundtable met on 20 June, the market continued its slide by another 354 points for a total -3.7% return over the two days. As one Roundtable Member noted, I find it actually very interesting [because] the stock market reaction should [have been] positive. Nevertheless, it appears that any surprise related to government policy during this prolonged recovery is a stimulus for heightened concern in the markets. On the other hand, even after the 354 point fall, the Dow was up 12.6% for the first six months of 2013, a strong endorsement of the future of U.S. business. THE SURVEY Prior to each quarterly Roundtable session, we conduct a survey to provide insights into the business views of the Roundtable Members in the Washington D.C. Metropolitan Area relative to their counterparts nationwide. Some of the survey questions are constructed to parallel those of the Duke University/CFO Magazine s Global Business Outlook Survey, which has polled senior finance executives over the past 69 quarters. The survey responses prompted conversation among the Roundtable Members regarding their expectations of domestic and global economic recovery, the financial condition of their own firms and evidence of recent actions for growth of their companies. Economic Outlook The June 2013 Darden IBiS Strategic CFO Roundtable Survey showed a noticeable increase in optimism about the economy that was similar in magnitude with the optimism reported in the national survey. The graph below depicts how CFOs rated their optimism about the U.S. economy on a scale of 0 100%. (See Figure 1) Both the Global Business Outlook Survey and the Darden IBiS Strategic CFO Roundtable Survey showed strong optimism with levels near the maximum reported since the beginning of the Roundtable survey in January The national survey (dashed line) rose from 51% for Q to 61% for Q while the Roundtable participants (solid line) recorded an increase from 54% in January to 61% in June. Thus, we see a consistent story of strong optimism for both the national and D.C. region regarding the U.S. economy. July 2013

3 Figure 1: Optimism for the U.S. Economy (Scale of 0 100%) 80% 60% National Survey 40% Roundtable Survey 20% Figure 2 compares the optimism of the two groups of CFOs for their own companies. Both groups have consistently reported higher levels of optimism for their own companies relative to the U.S. economy. For example, on average, our Roundtable Members have reported a premium optimism for their own company of about 13% since Both groups continued to report a premium optimism for June 2013, but the premium was only 1.1% for the Roundtable Members (solid line) and 3.4% for the national survey (dashed line). Thus, the two measures of optimism have converged as the sentiment regarding the overall economy has risen to a level that challenges how CFOs view their own companies. 80% 60% 40% Figure 2: Optimism for their Own Company (Scale of 0 100%) Roundtable Survey National Survey 20% Page 2 July 2013

4 The Roundtable Members offered a variety of reasons for their optimism, starting with signs that the consumer is feeling more confident: Employment.. there tends to be less bad debt across our different businesses than there was. So I think those are the reasons we're a little more optimistic than we were several years ago. Well, I think there are a lot of positive things going on. Obviously, the housing market and the stock market, people feel better, particularly housing, because when you look at the net worth of the country, a lot of it is tied up in homes. Since its inception, the Survey has asked participants to estimate the number of months that will pass before domestic employment will return to pre-crisis (year end 2007) levels for the U.S. economy. (See Figure 3) The solid line in the graph below reveals that the Roundtable Members expectations have been fairly constant around 33 months for the past couple of years. Although there has been variation in this number over time, it appears as though the Roundtable Members are tending to see the recovery as a slow process for which employment will take about three years to regain the ground lost in Or, as summarized by one Roundtable Member: I'm optimistic for the future. I just think it's slow, much slower than I might have thought otherwise. 50 Figure 3: When Will the U.S. Return to Pre-crisis Employment? (Months) U.S. Economy Own Company 0 The dashed line reflects the Roundtable Members optimism about the employment levels of their own companies. The Roundtable Members have consistently viewed their own employment levels as much better than the overall economy. For the June Survey, they reported an average of only five months to return to pre-crisis employment levels. This optimism was reinforced by 44% reported as either appropriately or overstaffed and 66% as hiring or looking to hire. Taken together, the U.S. Economy and Own Company results tell us that the Washington D.C.-area CFOs have managed to maintain their own employment levels very well while their predictions regarding U.S. unemployment continue to suggest a long recovery period. Page 3 July 2013

5 TOP OF MIND: Cash Strategies: The How/When/Why of Deploying Cash Corporate cash balances have been visibly healthy for the past couple of years. At the same time that debt levels have been declining, cash balances have been growing and continue to do so to such an extent that the popular press describes the behavior as cash hoarding. The Darden IBiS Strategic CFO Roundtable Survey posed a couple of questions designed to describe what companies were doing with respect to dividends, share repurchases and capital investments (including acquisitions). One third of the companies were planning to pay a regular dividend over the next 12 months and one third were planning to engage in share repurchases. Over half (55%) were planning a significant use of cash during the ensuing year, while only one company reported expecting to not use cash for any of these alternatives. Thus, almost all the companies expected to distribute cash to shareholders and/or invest significantly in their businesses. Or, as one Roundtable Member commented: We're growing. We're investing a lot. We're hiring a lot. But finding uses for the cash is challenging for us. Another Roundtable Member summed up his company s thinking regarding the use of cash as follows: We think about capital allocation as kind of having three components. One is obviously maintaining a certain level of financial strength and resilience and safety. And some of that has to do with how are you feeling about where the business is and where it's going and how much flexibility you have in your call structure to adapt to changes in the demand environment. Part of that is having a certain amount of liquidity on hand that you feel very comfortable with. But then once you get to that level, the next piece would be having dry powder to invest in the business, whether it's capital expenditures or acquisitions. Then the third component is cash distribution back to shareholders, either through dividends or buybacks. We actually have adopted a policy of not only having a dividend, but trying to grow it in line with earnings and cash flow over time. Around the table, all of the Members articulated a very methodical and thoughtful approach to the how, why and when of deploying cash. The will is there - which runs counter to any supposed strategy of cash hoarding. Part of the conversation around the table touched on the topic of activist investors and their impact upon dividend and share repurchase policies. The Roundtable Members related stories of communicating with their largest shareholders to learn their preferences between dividends and share repurchases. There were no stories about activist investors, per se, but one Roundtable Member commented: But in the spirit of not having to think too hard to decide what investors are thinking -- they may not be activists, but they are highly communicative. The Darden IBiS Strategic CFO Roundtable will re-convene in September Page 4 July 2013

6 About the Author Kenneth M. Eades, Paul Tudor Jones Research Professor of Business Administration, is the Chairman of Darden Finance Department and serves as Interim Faculty Director for the Darden Center for Asset Management, as well as Associated Faculty with the Darden Institute for Business in Society. The author of more than 50 Darden cases, Eades has received both research and teaching awards. About the Darden IBiS Strategic CFO Roundtable The Strategic CFO Roundtable is a quarterly convening of leading chief financial officers in the Washington D.C. Metropolitan area to discuss, debate, and share best practices for enhancing the strategic role of the CFO. With over 300 years of collective strategic financial and leadership experience, the Roundtable Members share their views on the challenges and opportunities facing their companies and the overall economy. The Strategic CFO Roundtable is organized by the Institute for Business in Society at the Darden School of Business of the University of Virginia. About Darden Institute for Business in Society The Institute for Business in Society (IBiS) is a Center of Excellence at the Darden School of Business at the University of Virginia. Its mission is to be a leading global catalyst and convener of thought, information and action at the interface of business and society. To achieve that mission, IBiS brings together the top thinking in business education with industry leaders, regulators and other thought leaders to understand and advance the role of business in providing lasting value and positive impact in an increasingly complex global society. Contacts: Jane Scott Cantus, Fellow, Darden Institute for Business in Society; Principal, ILEX Leadership Associates, LLC Ken Eades, Chair, Finance Department, Darden School of Business Dean Krehmeyer, Executive Director, Darden Institute for Business in Society Page 5 July 2013

7 Darden IBiS Strategic CFO Roundtable Survey Results June 2013 N = 9 N = 8 N = 15 N = 10 N= 453 N= 410 N= Compared to last quarter, are you more or less optimistic regarding:-u.s. economy (Less =1, More = 3) 1. Compared to last quarter, are you more or less optimistic regarding:-financial prospects for your own company (Less =1, More = 3) 2. Rate your optimism regarding: (Drag the slider to assign a number.)- U.S. economy 2. Rate your optimism regarding: (Drag the slider to assign a number.)-financial prospects for your own company 4. Regarding domestic employment, when do you anticipate a return to pre-crisis (year end 2007) levels for the U.S. economy-months 4. Regarding domestic employment, when do you anticipate a return to pre-crisis (year end 2007) levels for your firm-months 5. How would you rate...-your employees morale level? (Poor =1, Satisfactory =3, Excellent = 5) RT June 2013 RT Jan 2013 RT Sept 2012 RT May 2012 Duke Q2_13 Duke Q4_12 Duke Q2_12 Average Median Average Median Average Median Average Median Average Median Average Median Average Median Page 6 July 2013

8 Darden IBiS Strategic CFO Roundtable Survey Results June 2013 (Continued) (Weaker =1, No change = 2 Stronger = 3) 6. Recent quarter's financial results vs. previous quarter: -Income Statement 6. Recent quarter's financial results vs. previous quarter: - Balance Sheet 6. Recent quarter's financial results vs. previous quarter: - Cash Balance 8. Expected change over the next 4 quarters vs. last 4 quarters: -Income Statement 8. Expected change over the next 4 quarters vs. last 4 quarters: - Balance Sheet 8. Expected change over the next 4 quarters vs. last 4 quarters: - Cash N = 9 N = 8 N = 15 N = 10 RT June 2013 RT Jan 2013 RT Sept 2012 RT May 2012 Average Median Average Median Average Median Average Median (Reduced =1, No change = 2, Higher = 3) 9. Expected change over the next 4 quarters vs. last 4 quarters: - Headcount last 4 quarters: - Capital Spending last 4 quarters: - Compensation last 4 quarters: - Pro develop/training last 4 quarters: - Prob (new mkt/product) last 4 quarters: - Prob (Acquisition) Page 7 July 2013