The Daily Technical #41: What is a dividend recapitalization?

Good morning. Welcome to the 41st edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is the return on invested capital (ROIC) metric used to measure?

The return on invested capital ("ROIC") metric is used to assess how efficient a management team is at capital allocation.

A company that generates an ROIC over its cost of capital (WACC) suggests the management team has been allocating capital efficiently (i.e., investing in profitable projects or investments) and if sustained over the long-run, this indicates a competitive advantage.

ROIC represents one of the most fundamental assessments of a company: "How much in returns is the company earning for each dollar invested?"

Return on Invested Capital (ROIC) = NOPAT / Invested Capital

Common Mistakes

1. Ignoring the Cost of Capital: Some students forget about comparing ROIC with WACC. Always mention that a ROIC higher than WACC is the goal.

2. Misinterpretation of Terms: Confusing related terms (e.g., ROE or ROI) can weaken your response. Know your metrics and stick to specifically explaining ROIC.

3. Missing the Big Picture: Always tie metrics back to how they reflect the company's strategic health.

Key Takeaways / TLDR

• ROIC measures a firm's efficiency in investing and generating returns on its capital.

• The goal is for ROIC to exceed WACC. This signals value creation.

• ROIC = NOPAT / Invested Capital

TODAY’S QUESTION
What is a dividend recapitalization?

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