Facing a crucial decision regarding its cash distribution strategy, a medical device manufacturing company recently turned to the Nicholas Center for guidance. The company will soon realize significant gains in cash flows and needed to plan a distribution strategy. The team of Nicholas Center students embraced the challenge of determining the company’s best possible use of excess cash and began their work with a qualitative approach.
Through analysis of market trends and interviews with helpful board members in the appropriate professional areas (investment banking and investor relations), the team gained a thorough understanding of how investors perceive value creation and were able to create an approach to consider how to maximize shareholder value. Balancing benefits and potential concerns, the team ranked each of the primary options, which included a special dividend, a share buyback, a regular dividend, or some combination of the preceding options.
After the company provided the team with its long-range forecast, the team crafted financial models around each of the options, adjusting the models to account for relevant factors discovered in their research and interviews. They were then able to predict shareholder return scenarios based on the company’s free cash flows.
After this judicious analysis, the team offered its recommendation on the company’s best use of cash. The CFO took their analysis to the board to offer his final recommendation. The company benefited from having such rigorous thought into the issue while the Nicholas Center students gained a deeper understanding of the difficult decisions of companies with excess cash flows, which can negatively impact return on capital if they merely add to balance sheet reserves.