Capital Allocation Frameworks and Long-Term Shareholder Value Creation - TDM Growth Partners

Key takeaway

• For entrepreneurs: Developing and communicating a clear capital allocation framework is crucial for long-term business success and attracting quality investors.
• For investors: Understanding a company's capital allocation strategy is essential for evaluating its potential for long-term value creation and shareholder returns.

Summary

The article emphasizes the importance of capital allocation frameworks for businesses, arguing that a company's ability to deploy capital effectively is a key determinant of its future success. It advocates for public companies to make their capital strategies visible to investors, especially those with large cash balances or significant operating cash flow. The piece outlines the components of an effective capital allocation framework and provides examples from various companies.

Insights

• Every business should have a capital allocation framework that outlines options for investing available cash and expected returns.
• The framework should communicate management's recognition of capital allocation importance, their philosophical approach, and the relative priority of each option.
• A general capital allocation structure should prioritize maintaining a healthy business, then present options for excess capital.
• Free cash flow per share is a crucial metric that links capital expenditure, share repurchases, and stock issuance.
• Companies should target less than 2% net dilution when issuing stock to employees.

Implications

• Investors may increasingly focus on companies with clear capital allocation strategies when making investment decisions.
• Businesses without visible capital allocation frameworks might face increased scrutiny from long-term investors.
• Companies may need to develop more sophisticated approaches to estimating their intrinsic value to make informed capital allocation decisions.
• There could be a shift towards prioritizing free cash flow per share as a key performance metric for public companies.
• Boards and CEOs may need to dedicate more time and resources to developing and communicating their capital allocation strategies.