'Signalling' Marris Steps for Balanced Growth Path

Step 1:

“Our first priority is to grow the business that we currently have, so organic growth is a priority...secondarily, if we see opportunities for growth in acquisitions we will certainly seize those opportunities. In fact, I think we have a reasonable track record with that one.”

Step 2:

Key Ratios – Marris Financial Constraints

• Retention ratio whereby the lower the ratio the higher the funds to pay dividends.
• The higher the rate of retained profits the greater the potential the organization has for growth.
• Liquidity ratio whereby too high a value increases probability of takeovers.
• Leverage ratio whereby the higher the ratio the more difficult it is to borrow.

Step 3:

Share Price

• Share Price over 5 years showing increased value, with growth in Market Capitalisation of the firm.
• Security defence - reduces threat of takeover as per Marris.
• Share Price over 5 years showing increased value, with growth in Market Capitalisation of the firm.
• Security defence - reduces threat of takeover as per Marris.

Step 4:

Share Buyback

• Share buyback is used as a management strategy to inflate the shareprice, thereby increasing the value of the company, in line with the Marris principles.
• This has enabled Diageo to begin a policy of acquisition (higher valuation provides better opportunities of obtaining finance for acquisition).
• Drop in share buybacks in 2004 is explained by the exceptional cost from disposal of Burgerking in 2003

Step 5:

Growth Curve

Growth Curve

• Share price - indicator of Value which is our security variable
• R&D - a proxy of gd

Step 6:

• LISTEN to the video clip.
• Open the SIGNAL BOX.
• REPLAY the video clip.
• IDENTIFY the SIGNALS

General Template

Likely Impact on the Share Price

Economic fundamentals signal

Investor signal

Probables/possibility signal

NB: KFIs such as EV, p/e, q-ratio, PSR, ROCE, are reported. The signals in this BOX are gleaned from video interviews with analysts and CEOs.