What shareholder returns means to us
We focus on creating long-term, sustainable value – protecting the interests of our owners alongside those of our employees, customers and the communities in which we operate.
Our policy and commitment
We focus as much on the preservation and growth of the business as on the maximisation of shareholder value. We believe that in a free market system, and in the long term, the two will automatically coincide, even if there is some short-term divergence.
Delivering sustainable, profitable growth is therefore central to appropriate delivery of shareholder returns, and our performance framework is structured accordingly.
In summary, we strive to:
- ensure a balanced performance framework that recognises value must be delivered to our shareholders as well as our customers and the people who work in the business;
- align remuneration and incentive arrangements to long-term, sustainable value creation; and
- implement the new strategy presented to shareholders in March 2015 and deliver our five-year plan to achieve our purpose of becoming a trusted partner of governments, delivering superb public services that transform outcomes and make a positive difference for our fellow citizens.
Key components in our governance
- Our performance framework does not explicitly include ‘maximising shareholder value’. Instead, shareholder value is expected to coincide automatically with the appropriate achievement of ‘our deliverables’. Just as each component in the performance framework is expected to support achieving our deliverables, they are also expected to deliver shareholder returns in the long term.
- Short-term incentives include a mix of financial measures as well as key strategic goals aligned to generating long-term shareholder value, whilst long-term incentives directly include relative total shareholder return (TSR) as an explicit performance measure, alongside earnings per share (EPS) growth and return on invested capital (ROIC). As of 2018, an additional two performance measures have been included in relation to long-term incentives, which take into account progress in the Group’s employee engagement score and our order book. Taken together, we consider these five measures to be the most appropriate for sustainable shareholder value generation.
- Our Remuneration Committee has set personal shareholdings guidelines and requirements for our senior management team to support long-term commitment to Serco and the alignment of employee interests with those of our shareholders.
- Safeguarding shareholders’ investments, along with our assets, our people and our reputation, is paramount. For more information about how we manage and mitigate our collective business risks, see: Managed risk
Our performance framework
Our progress and performance in 2018
- As shareholders have not received dividend income in recent years, TSR is reﬂected in share price performance (SPP) only. Point-to-point SPP has been +52%, -31% and -3% from start to end of the financial years 2016, 2017 and 2018, respectively.
- SPP is inﬂuenced by many factors: financial and non-financial, historic and prospective, and related specifically to Serco and to the wider stock market. However, the earnings and returns on invested capital delivered are considered important to SPP. Underlying undiluted EPS performance was +18%, -17% and +55% for 2016, 2017 and 2018 respectively, whilst Underlying ROIC has been at 10.7%, 9.6% and 13.1% for these three years. The Group’s order book was £9.9bn in 2016, increasing to £10.7bn and £12.0bn in 2017 and 2018.
- Our initiatives and financial performance are comprehensively assessed in our Annual Report for each respective year, including Key Performance Indicators and broader discussion and analysis in the Strategic Report, Directors’ Report and Financial Statements.
Our next steps
As set out in our guidance and outlook, we expect to deliver further progress in 2019, with Revenue growth of 3-4% anticipated and Underlying Trading Profit forecast to increase to approximately £105m. Revenue growth is expected to accelerate to around 5% in 2020. In terms of our ambition of achieving margins of at least 5% over the longer term, we believe this is still achievable. We continue to deliver against our plans and make good progress against our strategy.