After listing actions management can take to maximize cash and working capital, reduce costs, and drive revenue, authors David Rhodes and Daniel Stelter cite valuation as a competitive tool:
Your company’s share price, like that of most firms, will take a beating during a downturn. [Been there, done that – my comment.] While you may not be able to prevent it from dropping in absolute terms, you want it to remain strong compared with others in your industry.
Enhancing relative valuation, a familiar benchmark for IR people, calls for communicating your strengths vs. the peer group. Of course, messages to investors must follow concrete actions by management:
In a downturn, our data shows that markets typically reward a strong balance sheet with low debt levels and secured access to capital. Instead of being punished by activist investors and becoming a takeover target for hedge funds, a company sitting on a pile of cash is viewed positively by investors as a stable investment with lower perceived risk.
Stability that may seem sleepy and boring in good times is suddenly popular – but you need to talk about it, the BCG guys say:
For that to happen, you need to create a compelling investor communications strategy that highlights such drivers of relative valuation. This will also be important as you try to capitalize on the competitive opportunities that a recession offers, such as seeking attractive mergers and acquisitions.
The consultants also say raising dividends has proven more effective than share buybacks in driving valuation. But they note the potential conflict between richer dividends and maintaining a healthy cash hoard.
(Call or email me if Johnson Strategic can help you put together a compelling IR strategy or craft messages for these turbulent times.)