Corporate Use of Cash

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Corporate Use of Cash March 13, 2008 Karin Kane,
Jason Lindauer and Matt Achilarre Thomson
Financial
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Agenda

• Cash Use Trends
• Identifying the Best Use of Cash
• Investor Preferences
• Summary
• QA

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Cash Cash Equivalents
Source Thomson Financial, Compustat
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Cash Cash Equivalents
Source Thomson Financial, Compustat
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Cash Cash Equivalents
Source Thomson Financial, Compustat
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Uses of Cash
Source Thomson Financial, Compustat
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Capital Expenditures
Source Thomson Financial, Compustat
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Dividends
Source Thomson Financial
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Net Buybacks
Source Thomson Financial
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MA
Source Thomson Financial / SDC
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Use of Cash SP 500
Source Thomson Financial
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Identifying the Best Use of Cash
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Return to Business v. Return to Investors

• Keeping cash on the balance sheet may be the best
  bet right now
• Banks are tightening lending standards, even for
  large companies 1
• Firms are considering switching banks or at least
  evaluating other options
• Investor focus has shifted from yield to risk 2
• TF research shows that companies with two
  consecutive quarters of increasing cash tend to
  outperform in the second quarter 3

1 Federal Reserve Senior Loan office Survey,
January 2008 2 Sarah Jones, JP Morgan Treasury
and Security Services, quoted in CFO Magazine 3
Lab Thomson, Cash is King, February 2008
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Dividends

• Pros
• Positive signal of future cash flow generation
• Increases total return expectations
• Guaranteed cash to investors
• Aligns company with new investor class
• Cushion to poor performance
• Cons
• Negative signal of future growth potential
• Reduces flexibility severe consequences if
  reduce or eliminate
• If dividend already strong, increase may not
  boost ownership
• Adds volatility around ex-dates
• Increases record-keeping costs
• Vulnerable to tax issues

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Buybacks

• Pros
• Signal managements perception of relative
  valuation
• Suggests company a better value than outside
  investment opportunities
• Increases EPS and ROE
• Gains are tax-free
• Allows tremendous flexibility
• Cons
• Negative signal of future growth potential
• May reduce liquidity or index weighting
• Need to execute lose credibility with no benefit
  
• Restrictions on timing

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Investor Preferences
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Investor Preferences
Source Thomson Financial, 13F Filings
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Investor Preferences
Source Thomson Financial
Source Thomson Financial, 13F Filings
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Quantitative Analysis
Higher Multiple, Lower Yield, Higher Growth
Lower Multiple, Higher Yield, Lower Growth
Google is 1 Holding
Chevron is 1 Holding
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Source Thomson Financial, 13F Filings
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Qualitative Analysis

• I look at where management will be focusing the
  capital.
• A gas company should form an MLP to push down as
  much of the assets and invest in the
  opportunities that it has. After it puts more
  assets in the MLP, it should take the cash and
  buy back stock and invest in other areas. I would
  rather it buy back stock and focus on the gas
  business.
• We are driven by yield. A dividend is important
  for a gas company.
• I focus on EBITDA, growth, and investment
  opportunities.
• We are not that concerned with
  quarter-to-quarter, year-to-year results.
  Companies will suffer through good times and bad.
  I am more worried about strategic judgment
  errors. We look for essential businesses which
  have very strong thoughtful management teams who
  understand outside shareholders. We look for
  things that have minimum financial risk given
  their industries. We like dividends.

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Source Thomson Financial Perception
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IR Tools

• There are tools that can aid in your
  decision-making
• Shareholder Identification
• Understand who your shareholders are
• Dividend/Buyback Studies
• Summarizes shareholder risk and investor
  opportunities
• Perception Studies
• Qualitative analysis of investor preferences

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Summary
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Summary

• Cash levels are near all time highs
• Capital allocation is critical, especially in a
  shaky market
• Companies may be less willing to deploy cash in
  current credit environment
• Decreases in dividends and buybacks are expected
• But investors may not react positively!
• Comprehensive understanding of investor
  preferences is critical
• Investor preferences and industry trends do
  change over time
• Quantitative and qualitative analysis can be
  utilized to identify opportunities and risks
• Due diligence should aid in external message
  development and can be used to set internal
  expectations

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Any Questions?
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Contact information

• Please do not hesitate to call
• Karin Kane
• 312-288-3029
• Karin.kane_at_Thomson.com
• Jason Lindauer
• 301-545-4323
• Jason.Lindauer_at_Thomson.com
• Matt Achilarre
• 646-822-6445
• Matthew.Achilarre_at_Thomson.com
• Our full report on Corporate Use of Cash will be
  released in May