Corporate Insights The roots of growth – strategies for optimal capital deployment
(3rd Quarter 2018)
- Growth is emerging as the key value driver
- A framework for investing and value
- Deconstructing growth forecasts
- Reverse engineering the value chain to create a decision framework
- Is the bar for investment set too high?
Since the end of the financial crisis nearly a decade ago, our clients have worried about capital deployment and growth. Prior work we have done shows that the market placed a larger premium on profitability than on growth in the years immediately following the financial crisis. More recent analysis by us suggests that growth is once again becoming an important and perhaps differentiating feature of companies with the highest valuations.
But growth is not simply something that happens to companies. Growth requires strategic planning and capital allocation policies that take advantage of profitable opportunities. Therefore, we thought it worthwhile to return to one of the first topics of our Credit Suisse Corporate Insights series – capital deployment – and elaborate on how to maximize its impact on shareholder wealth.
At every point in a business cycle, managers spend time thinking about the most value enhancing uses of excess cash. At this particular point in the cycle, with investors paying more attention to growth, we believe the top priority for our clients should be reinvesting in their businesses. Indeed, the macroeconomic backdrop and monetary policies in place, especially in the U.S., are highly supportive of investments today which should continue to accelerate future corporate growth. However, with assets priced at a premium as a decade long market rally continues, delivering adequate return on growth investment might seem challenging.
So, establishing a rigorous capital deployment framework is even more vital now. This paper, the eleventh in our ongoing series of Credit Suisse Corporate Insights, presents a decision framework to help guide our clients on how their capital deployment choices can be optimized to drive profitable growth. In this paper, we explore the relationship between growth and value and then show how corporate decision-makers can leverage that relationship to beat the market's expectations and – along the way – justify higher share prices.