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Capital Allocation


First quarter earnings provided the first look at changing capital allocation priorities on the back of significantly improving cash flow generation within the market.

In our last 5×5 we discussed capital allocation expectations as the market continues to recover, and the result has been an even split between a return to more shareholder-friendly activities and prioritization of debt reduction. Sectors across the board are flush with cash, supported by topline growth and margin expansion, allowing for greater optionality as management teams return to pre-pandemic capital allocation strategies. If the market continues at this pace, subject to potential pandemic-related obstacles, we expect to see an increase in shareholder-friendly activities throughout the year.

As a general theme, we are seeing debt reduction becoming a heightened focus among the manufacturing and energy sectors, with the technology and consumer discretionary sectors shifting priorities toward dividend payouts, share repurchases, and future M&A. The commercial airline sector remains stuck in limbo, with travel volume stabilizing somewhat in the first quarter but still well below pre-pandemic levels. Airlines have no choice but to burn cash at record levels, and while debt profiles should remain stable as current liquidity appears sufficient, debt reduction will not be prioritized until cashflows return to more normalized levels.

    • US Steel (X) repaid $1.2bn of debt, prioritizing >$500m total debt repayment for the remainder of the year. Management took action to restore secured debt capacity by issuing lower coupon unsecured notes to repay secured notes, extending its debt maturity profile, and releasing collateral in the process. In addition, a $1bn capex project was canceled, which will support cash flow generation for additional debt repayment in FY21.
    • Fidelity National Information Services (FIS) announced it would increase its quarterly dividend by 11% consistent with its long-term annual growth target of 10-15%, while simultaneously authorizing a large share repurchase program (fair value $13bn as of 2/1/21). Management continues to target high growth assets with M&A being a top capital allocation priority, supported by very strong cash flow generation.

The market is reflecting improving flexibility and optionality as cash flows return to more normalized levels, and as we progress through the remainder of the year, we expect management teams will increasingly reallocate capital towards shareholder-friendly activities. With an ongoing theme of LBO and M&A activity on the horizon, we remain vigilant as we assess changing capital allocation priorities over the next several quarters.


Global M&A volume and deal count has been trending upwards since the onset of the pandemic

Source: Bloomberg, 5/31/21



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