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Exhibit 5. The TSR Sustainability Matrix Helps Executives Decide Where They Want to Play

TSR goal of 10 percent

TSR goal of 15 percent

10.0%

15.0%

17.5%

22.5%

27.5%

30.0%

60

60

4.0%

6.0%

7.0%

9.0%

11.0%

12.0%

Net- income payout (%)

40

6.0%

10.0%

7.3%

12.2%

8.0%

13.3%

Net- income payout (%)

40

18.3%

11.0%

12.3%

20.5%

13.0%

21.7%

10.0%

10.9%

11.3%

16.3%

17.1%

17.5%

20

20

8.0%

8.7%

9.0%

13.0%

13.7%

14.0%

10x

15x

20x

10x

15x

20x

Price-to-earnings (P/E) multiple

Price-to-earnings (P/E) multiple

Net-income growth

Return on equity

Source: BCG analysis.

In our experience, the TSR sustainability matrix gives senior executives and board members an intuitive feel for the dynamics of TSR creation and helps them see their company’s prospects more like investors do. The real value of the matrix, however, comes not at the level of the simple mathematical model described above. Rather, it comes when executives use the model to think through their strategy for achieving sustainable value creation, given their current starting point.

Where to Play—and How to Get There

We have used the TSR sustainability matrix with the senior teams at a number of our clients to frame an in- depth analysis of their company’s TSR potential. The conversation usually begins with the question, Where are we currently located on the matrix? But it quickly evolves into Where do we want to play in the future? And, finally, it turns into How are we going to get there? To be sure, the debate will be only as productive as the quality of the data that executives bring to the table. How confident are they about their estimates of the amount of growth their organization will be able to de-

liver? Do they have a clear picture of where that growth will come from—how much from organic growth, from margin improvement, and from acquisition?

Some things will be easier to estimate than others. Most companies, for example, have a relatively clear idea of the level of cash payout they are targeting. But few have much confidence about where their multiple will be in, say, three years’ time—especially today. No matter. The fact is that a market-assigned P/E multiple fundamental- ly shapes a company’s requirements for delivering supe- rior TSR, and executives need to anticipate in advance the likely impact of a significant increase or decline in their current multiple on their plans to deliver sustain- able TSR. What’s more, tools for identifying the drivers of differences among valuation multiples within a peer group can shed considerable light on where a company’s P/E multiple is likely to end up, given a company’s strate- gic and financial plans.17

17. For a more detailed description, see the discussion of comparative multiple analysis in Missing Link: Focusing Corporate Strategy on Value Creation, The 2008 Value Creators Report, September 2008, p. 22.

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