6 Considerations for Crafting an Effective Capital Return Program

Taulia Treasurers’ Club provides an opportunity for treasurers to meet each quarter in order to exchange views, explore trends, and discuss top-of-mind subjects with like-minded peers.

This quarter, the topic of choice was ‘Key considerations for capital return programs’. In the following blog post, we outline some of the key takeaways from the discussion.

Capital return programs: an overview

Capital return programs – in other words, initiatives to return capital to the company’s shareholders – can play an important role in helping companies achieve their goals. With a well-executed program, companies have the opportunity to increase shareholder value and maintain a competitive position.

Capital return programs can take the form of share buybacks or dividends paid to shareholders and may be funded either via the company’s cash holdings or by raising debt. As well as enabling companies to optimize capital structure and boost shareholder value, capital return programs can also be used to signal financial strength to the market.

But before treasurers can tap into these opportunities, careful planning is needed to balance considerations such as operational flexibility, investments in growth, and investor expectations while navigating the challenges presented by governance requirements, tax considerations, and market complexity.

From establishing minimum cash reserve thresholds to aligning your program with shareholder expectations, here are 6 takeaways from the latest Taulia Treasurers’ Club discussion about how to plan an effective strategy for your capital return program.

Takeaway 1: Define and assess ‘excess cash’ carefully

Capital return programs can be an effective way of putting the company’s excess cash to work. But first, it’s important to have a clear understanding of how much cash is truly available.

As part of this exercise, treasurers need to account for the company’s operational needs, capital expenditure (CapEx), any potential mergers and acquisitions (M&A) that might be on the horizon, and growth investments.

In particular, questions should be asked about the sustainability of excess cash. For example, is your cash the result of recurring, predictable cash flows? Or does it derive from one-off events, such as asset sales or exceptional collections? All of this should be factored in when deciding how much cash is available for the program.

Takeaway 2: Long-term planning is critical

Treasurers need to carry out long-term financial planning when preparing for a capital return program. This should involve a three- to five-year horizon supported by regular cash flow projections.

As part of this exercise, treasurers will need to balance the benefits of immediate shareholder returns against future growth opportunities – so it’s important to harness strategic foresight and plan ahead effectively.

Takeaway 3: Dividends vs buybacks

When it comes to devising a strategy for the capital return program, a key step is to weigh up the benefits and risks of the two main options available – namely, paying dividends to investors or using excess cash to buy back the company’s shares.

Dividends

• Benefits: Dividends offer some significant benefits as a means of returning capital to shareholders. For example, payouts are made on a predictable schedule, which is beneficial when it comes to attracting income-focused investors and signals that the company is financially stable.
• Risks: However, dividends also come with certain risks. For example, the need for regular payout commitments can result in less financial flexibility. There is also a risk that suddenly cutting payouts could damage investor trust and cause stock prices to fall.

Buybacks

• Benefits: Buybacks give companies the flexibility needed to adjust to variations in their cash flows and changing market conditions. They also increase the value of the remaining shares – thereby reducing the dilution associated with stock-based compensation – and indicate that the business is in a strong financial position. Furthermore, they can be used to support the optimization of the firm’s capital structure.
• Risks: On the flip side, buybacks may be significantly impacted by market conditions, and the timing of a program is essential as the exercise will deplete the company’s cash reserves. Shareholders, meanwhile, may interpret a buyback as a sign that cash isn’t being used to grow the company.

Takeaway 4: Address tax and structural complexities

For treasurers, another consideration is that capital returns programs need to be fully compliant with tax laws – particularly when it comes to repatriating offshore cash.

First and foremost, companies should determine whether the entity holding excess cash can return it to shareholders. If not, treasury will need to develop a plan to transfer it to the appropriate entity.

As part of this exercise, treasurers will need to develop frameworks that can minimize their legal and tax liabilities. Likewise, they should collaborate with their legal and tax teams to establish frameworks that enable the efficient movement of cash.

Takeaway 5: Governance and risk management are crucial

Different leaders will have different thresholds when it comes to setting the minimum level of cash reserves held by the company. Treasurers will therefore need to have a clear understanding of the board’s risk appetite and establish a consensus on the minimum cash reserve levels for the business – while building in flexibility in case circumstances change in the future.

Treasurers should also gauge the impact of capital returns on the company’s credit ratings, debt covenants, and financial flexibility and should align governance policies accordingly. Above all, treasurers should create clear and adaptable policies for evaluating and implementing their capital return strategy.

Takeaway 6: Align with shareholder expectations and industry norms

Meeting shareholder expectations is key when it comes to a successful capital return program. Where dividends are concerned, companies should set a predictable schedule for capital returns, such as annual reviews or dividend increases, in order to build trust with investors.

On another note, dividend and buyback strategies should be tailored to match the relevant investor profiles. For example, some investors will be looking for a predictable income stream, whereas others will be growth-oriented. To remain competitive and ensure that market expectations are met, the company should benchmark the program against industry peers and standards.

Conclusion

Whether you opt for dividends or buybacks, a well-executed capital return program can serve as a powerful tool for enhancing shareholder trust, optimizing financial performance, and maintaining a competitive position. The process does involve navigating a certain amount of complexity, and there are certainly some pitfalls to avoid – but by taking note of the 6 takeaways listed above, treasurers will be better placed to craft an effective and sustainable program.

Want to learn more from treasury peers? The Taulia Treasurers’ Club is an exclusive forum for treasurers to network, engage with like-minded peers on topics that are top of mind, challenge each other’s thinking and share best practices. The topics are driven by treasurers for treasurers.
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