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yield from 1 percent to 3 percent and allowing the com- pany to deliver a TSR of 11 percent—not quite its histor- ic level of 15 percent but still likely to be above average for the market as a whole. long-term strategy will best deliver its 15 percent TSR target. For example, should the company try to renew its cash-machine strategy by cutting selling, general, and ad- ministrative (SGA) expenses and improving the efficien- cy of its sales and distribution process in an effort to squeeze more net income out of its existing business? Or should it, perhaps, shitoward a growth-engine strategy by investing heavily in innovation in order to gain market share and deliver signifi- cantly higher ongoing revenue growth? Or should it, rather, embark on a major port- folio migration by divesting low-ROE and low-organic-growth businesses and pursu- ing larger and more transformative M&A deals than the company has ever consid- ered to date? The CEO, however, wasn’t prepared to settle for that less ambitious target. So the discussion inside the senior team began to focus on whether there was anything the company could do to get its multiple back up to its historical level and add additional TSR that way. An analysis of the drivers of P/E multiples in the industry and interviews with leading investors suggested that the company could actually raise its near-term P/E through some carefully designed financial moves. If, instead of simply increasing the amount of its share repurchases, the company used its bigger cash pay- out for a combination of dividends and debt retirement, the reduction in the company’s perceived risk profile would likely increase the company’s multiple by 25 per- cent relative to its peers, allowing it to rise to about 19 over the next three years. Aer adjusting for the lost yield from the discontinued share repurchases and the impact on its cash flow yield from a higher P/E multiple, this increase in the company’s valuation multiple would add about six percentage points to its annual TSR over the next three years. In other words, the company could achieve its 15 percent target TSR in the near term by moving almost full circle in the matrix, from the lower right through the lower middle and center cells to the middle right cell. The TSR sustainability matrix focuses senior management’s attention on key tradeoffs. None of these options is without risk and each requires managing complex tradeoffs between short-term and long-term value creation. Each one also has quite differ- ent implications for the company’s business strategy, fi- nancial policies, and investor communications. The value of engaging deeply around the company’s TSR sustain- ability profile, however, has been to focus senior manage- ment’s attention on the key tradeoffs and to deepen its understanding of both the opportunities and risks of fu- ture options. A Step Ahead Of course, going through the exercise of determining a company’s TSR sustainability profile is only the first step on the road to sustainable value creation. But done right, a company’s senior executives should eventually come out of the process with a detailed road map that includes the following: But this was only a temporary solution. It bought time, but it still leopen the question of how the company would be able to sustain its TSR performance aer the impact of the financial moves was fully reflected in its multiple. Once the cash payout was set at 45 percent of net income and the P/E multiple stabilized at 19, the com- pany would still need to deliver 13 percent growth in net income. Eventually, the company would have to consider a more radical move. An explicit TSR target that strikes an appropriate bal- ance between a company’s aspirations and what it can realistically achieve and between performance over the short term and over the long term

At present, the company is carefully assessing two sets of strategic options. First, does it take the steps described above in order to buy a few years’ time to develop a long-term solution? Or does it focus its efforts on quickly developing a long-term solution instead? Second, in ei- ther case, it needs to determine precisely what kind of

  • A detailed understanding of the performance improve- ments required in order to achieve that target and the precise sequence in which those improvements need to take place

  • A sense for how shis in the company’s valuation mul- tiple will likely impact the company’s performance re-

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