TSR

Question 1

What is the conponents of TSR Strategy?

Answer 1

TSR strategy: Building an integrated strategy for value creation
- Business strategy (Growth, margins, portfolio, targets, risk) - sounds like operational
- Financial strategy (capital structure, dividends/buyback)
- Investor strategy (Valuation multiple, messaging, migration)

Question 2

Drivers of TSR

Answer 2

1. Earnings growth
   
   1. Revenue growth, net income margin
2. Multiple expansion (change in valuation - P/E)
   
   1. Growth and profitability expectations (revenue, EPS, innovation, margins, ROIC)
   2. Performance consistency and meeting expectations
   3. Confidence in management
   4. Portfolio changes
   5. Targeting optimal investors
   6. Dividend and share repurchases
   7. Risk factors (debt, volatility, M&A)
3. FCF contribution
   
   1. Net income - reinvestments (CAPEX, Working capital needs) dividends, share repurchase, debt, cash

Question 3

Why is Price/EV a wrong metric?

Answer 3

The chosen numerator and denimoniator must be relevant to each other
- For example EV links to Sales or EBITDA (Focus on both equity and debt holder)
- Equity value links to net income, earnings per share (only focus on equity holders)

Question 4

What is valuation multiples influenced by?

Answer 4

Change in valuation multiple is influenced by:
- Growth variables (e.g. revenue growth)
- Cash flow variables (e.g. growth margin)
- Return and balance shset variables (e.g. inventory turnover)
- Leverage variables (e.g. debt/capital ratio)
- Other variables (e.g. dividend payout ratio)

Question 5

How can a company work with their financial policy?

Answer 5

• A company’s financial strategy is a set of decisions it makes about its capital:
  
  • Invest in growth - Organic vs inorganic growth
    
    • Organic: What investment should be made to drive earnings growth?
    • Inorganic: Is the current M&A strategy clear and appropriate?
  • Mange the balance sheet
    
    • Pyy down debt: What is the optimal leverage structure that preserves the company’s desired credit ratings?
    • Keep cash on the balance sheet: “how much cash should be left on the balance sheet?”
  • Payout to shareholders
    
    • What persentage of Free Cash flow should be invested back in the business vs to shareholderS?
    • Dividend distribution - payment to shareholders
    • Share repurchases - company buyback.

Question 6

How does financial policy impact shareholders?

Answer 6

Each decisoin has unique implications for shareholders
1. Invest in growth
- Organic
- TSR will increase when growth is profitable and appropriately balanced. High rates of growth require significant cash investment, diverting funds from other opportunities
- Inorganic
- High-risk growth strategy and is often disounted for sharheolders unless there is a clear and compelling rationale to support it
- Majority of M&A deals fail
- TSR depends on deal characteristics, execution risks, return and fit with company.

2. Manage the balance sheet
   - Pay down debt:
   
   • Having a healthy D/E ratio is important formaintaining liquidoty for investments and i salso key to maintaining investment-grade ating for the company
   • Reducing debt levels lowers debt payments, freeing up cash for other purposes
   • Value investors see low debt levels as an inefficient use of balance sheet.
     - Keep cash on the balance sheet:
   • Protect companies in tough times
   • Enables funding of future growth
   • Excessive cash frequently viewed as inefficient as it provides low returns
   • May encourage reckles investments or acquisitions by management
3. Payout to shareholders
   - Dividend distribution:
   
   • The decision provides “guaranteed” return and is important to non-growth investors.
   • Dividend increases can unlock trapped value through increased yield which is particularly valuable in a yield-scare environment
   • HIgh yield provides floor for the share price which increars as P/E declines
     - Share repurchases:
   • Buybacks improve earnings per share (EPS), which can elevate market value of remaining shares
   • Long-term investors who do not sell their shared during buybacks like buyback’s tax efficiency: They are not subject to taxes, whereas shareholders selling shares and/or receiving dividends are taxed.