Generally speaking, a company's best approach for boosting a share
price is to grow its earnings and/or, if applicable, increase its
dividend payment. How this is done is what determines whether or not
its current market position is sacrificed. For example,
indiscriminate layoffs or cuts in research and development could
dramatically boost profits in the short run, but could have very
negative consequences in the long run. However, acquiring more
productive personnel or improving the productivity of a research and
development activity could be extremely beneficial even if cost
reductions were not achieved. Another approach is purely financial in
nature: the company could buy back shares so that fewer shares would
be outstanding, thereby increasing the effective earnings per share
even if earnings did not grow.
Various methods exist to boost a firm's share price through growth.
Identifying attractive investment opportunities, such as opportunities
to develop new products or enter new markets, can create profitable
growth. Acquisitions are another popular method for generating
growth. Although the acquiring company's stock price typically falls
at the time of acquisition, the right acquisition can pay off
handsomely. All of these methods can boost a company's share price
without sacrificing its current market position.
Cost-cutting is another area that has the potential to boost a firm's
share price, but it carries the risk of compromising a firm's market
position if it is done improperly. Identifying underperforming
businesses, wasteful processes, and unproductive employees and
eliminating them can boost a firm's share price while leaving its
competitiveness intact or even increase it.
A third area that has gained increasing prominence is identifying and
eliminating unprofitable customers. Sometimes, there is little point
in having a large market share if a large percentage of that market
share is undesirable. Customer segmentation can leave the company
firmly entrenched in its desired target market while improving its
financial performance even if its overall market share is decreased.
Another purely financial approach is to increase the firm's dividend,
either because earnings are growing or because the firm lacks
attractive investment opportunities. A company's market position may
be strong but further investment in that market may be unwise,
resulting in shareholders favoring return of capital.
Finally, firms that are at risk of financial distress because of high
debt levels can improve their stock price by paying down debt. When
such payments are made because of a firm's improved financial
performance, rearranging its capital structure can be done without
compromising its current market position.
Sincerely,
Wonko
Sources:
"The Growth Imperative" Oligopoly Watch (August 16, 2005)
http://www.oligopolywatch.com/2005/08/16.html
"What makes a share price move?" BBC (December 2, 2005)
http://news.bbc.co.uk/1/hi/programmes/working_lunch/4493088.stm
"The Price May Be Right" Globe and Mail (December 21, 2005)
http://www.theglobeandmail.com/servlet/story/RTGAM.20051221.rmtaylor1223/BNStory/specialROBmagazine/
"Principles of Corporate Finance" fourth edition by Brealey & Myers,
McGraw-Hill Inc. (1991) pages 49-60).
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