A Road Map for Sustainable Value Creation
S the company’s valuation multiple does not grow too large; if and when it does, it is probably time to shi to another pathway. And, of course, both portfolio migrators and value impresarios are always on the lookout for the next best way to beat investor expectations and deliver superior TSR. ustainable value creation is all about making choices that optimize the total performance of the business. But how do senior executives identify the right tradeoffs and most appropri- ate options for their company, given its start- ing point in the capital markets, its competitive position, and the dynamics of its industry? The best way is to start looking at the company’s TSR potential the same way that investors do—by developing an in-depth under- standing of the company’s TSR sustainability profile. In working with our clients on assessing their future TSR potential, we have found it useful to think of sustainabil- ity in terms of something we call the TSR sustainability matrix. The matrix is a simplified framework designed to portray the dynamic relationships among the main driv- ers of TSR. To understand these dynamics, consider the simple graphic in Exhibit 4. Imagine a company with a goal of generating a long-term TSR of 10 percent. That The BCG Sustainability Matrix Although each of the routes to sustainable value creation described in this report has a distinctive emphasis, what- ever approach a company decides to take will be suc- cessful only if it optimizes performance across all of the drivers of TSR. Growth engines emphasize rapid growth exceeding investor expectations, but they deliv- er sustainable above-aver- age TSR only when that growth does not come at the expense of severely eroding margins; indeed, in the best case, the growth ac- tually delivers higher mar- gins by exploiting scale ad- vantages that create oper- ating leverage. Similarly, a cash-machine strategy will deliver sustainable above- average TSR only as long as goal is close to the long-term historical average and may well be slightly above average in the years to come. Exhibit 4. The BCG TSR Sustainability Matrix Shows the Dynamic Relationships Among the Main Drivers of TSR To make the math easy, let’s also assume that the company trades at ten times earnings and pays out 20 percent of its net income in the form of div- idends or share repurchases. Since a 20 percent payout at a price-to-earnings ratio of 10 results in a cash flow yield of 2 percent, the company would have to grow its market capi- talization by 8 percent in or- der to reach its TSR goal. Since our stylized example as- sumes a stable valuation mul- tiple, that means growing net TSR goal of 10 percent 10.0% Net- income payout (%) 20 8.0% 10x Price-to-earnings (P/E) multiple Net-income growth Return on equity Source: BCG analysis.
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