Our six specific objectives:
3 Third, to improve total share owner return by maximising the return on investment on the Company’s almost £800 million (or $1.2 billion) free cash flow. There are broadly three alternative uses of funds:
Capital expenditure, which usually approximates the depreciation cost. Pressure here has eased as technology pricing has fallen, although we are investing more in real estate following lease renewals, particularly in New York, to secure greater efficiencies.
Mergers and acquisitions, which have historically taken the lion’s share of free cash flow. Here we have raised the hurdle rate on capital employed so that our return on capital may be increased. Even so, there are still interesting opportunities, particularly outside the US, where pricing remains lower, despite the recent financial crisis, and where there is a closer fit with the Company’s strategic objectives. Private transactions remain more attractively priced at single-digit price-earnings multiples.
Our acquisition focus in 2008 was again on the twin opportunities of faster-growing geographic markets and new technologies, totally consistent with our strategic objectives in the areas of geography, new communication services and measurability.
Dividends or share buy-backs. We were the only FTSE 100 company to consistently increase its dividend by 20% per annum for the 10 years up to 2007. In 2008 we increased the dividend by 15%. Given dividend cover of four times headline earnings and a dividend yield of over 1% in recent years (although current yields are in excess of 4%), we believe we can continue to increase the dividend. A rolling share buy-back program appears to offer a more significant benefit to total share owner returns. In 2007 we boosted the target level of the share buy-back program from 2-3% of the outstanding share capital to 4-5%, spending over £400 million in that year on buy-backs. In the first half of 2008, we bought back almost 19 million shares, equivalent to 1.6% of share capital, at a cost of £112 million, but then withdrew from the market during the TNS bid process.
For the two years following the acquisition of TNS, we will limit our share buy-back program to a target of 1% of share capital per annum and dividend growth at 15% per annum, subject to review by the Board. We expect these actions, together with a reduced level of acquisition spend (targeted at £100 million per annum), to generate surplus cash and a reduction in borrowing levels.
- Sum of share buy-backs and dividends paid divided by average shares in issue for the relevant period, as a % of the average share price for the relevant period.