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Financial Review

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“Diluted underlying earnings per share has
grown by 42% over the last year and by 34% compound per annum over the last five years.”

This Review provides details of the Group’s capital position and how we manage our capital, the financial performance of the Group’s businesses during the year, analysed between our continuing operations and discontinued operations, and an assessment of that performance against our financial objectives. It includes a detailed analysis of the results, expenses and margins of our businesses, together with a commentary on the balance sheet and cash flows. The way in which the Group manages, monitors and quantifies the risks inherent in its businesses is set out in the Risk Management section that follows this Financial section.

    Capital and capital management
    Approach
    The Group’s capital management framework is intended to ensure that it maintains sufficient capital to:
  • meet regulatory requirements at all times;
  • support business growth and the Group’s distribution policies;
  • achieve an appropriate credit rating for the Group;
  • enable the Group to access sufficient committed funding to meet stressed liquidity requirements; and
  • absorb unexpected losses that might arise from the current and projected risk profile of the businesses, including credit, market, operational and business risks.

This framework is supplemented by a risk assessment which quantifies the capital requirements of the Group’s business activities. The Group’s risk appetite includes targets designed to maintain an appropriate surplus over the minimum perceived as necessary to meet the above objectives.

Given the Group’s core financial objective of maintaining a high post-tax return on equity, it is not the Group’s policy to hold excess capital for protracted periods. Accordingly, the Group manages its distribution policy and capital structure over time to target a prudent balance between equity and various forms of debt capital available in the capital markets.

Distribution policy
The Group’s policy is to grow the level of dividend in US dollar terms, whilst maintaining cover of at least two times underlying earnings (that is earnings excluding performance fees). The total dividend for the year has grown by 40% from last year in US dollar terms. This year’s dividend is covered 2.7 times by underlying earnings and 3.4 times by total earnings. The Group declares its dividends in US dollars but will continue to pay the dividends in sterling, except where private overseas shareholders have elected to receive dividends via the Transcontinental Automated Payments Service (TAPS).

The Group also earns substantial performance fees in addition to underlying earnings, and it remains the Board’s long-term strategy to use an amount of up to the Group’s post-tax performance fee income in the repurchase of its own shares where to do so is earnings enhancing to shareholders. This share repurchasing will take place in the market on a continuing basis from year-to-year rather than being confined within the accounting periods during which performance fees are earned. During the year 44,019,161 ordinary shares were repurchased and cancelled at a total cost of £197 million ($375 million), giving an average cost of £4.46 per share (more details are given in the Directors’ Report page).

This repurchasing activity was earnings enhancing, resulting in a 0.7% accretion to diluted underlying earnings per share and a 0.4% accretion to diluted earnings per share on total operations in 2007 on a full year basis. In addition, the Company set up an irrevocable, non-discretionary programme to purchase shares for cancellation on its own behalf, during the close period, which commenced on 1 April 2007 and ended on 30 May 2007 with acquisitions effected within certain pre-set parameters. 364,000 shares were repurchased under this programme at an average cost of £5.57 per share. At 31 March 2007 the Group’s cumulative post-tax performance fees available for future share repurchases amounted to $271 million.

WACC
The Group’s estimated weighted average post-tax cost of capital (‘WACC’) is 12.1%. This figure is based on a cost of equity of 12.6% (using CAPM and assuming a beta of 1.44 – source: Bloomberg) and a post-tax cost of debt of 5.3%. With a post-tax return on equity of 30.9% for the year, the Group’s shareholders are seeing a return of two and half times the Group’s cost of capital. Over the previous five years returns have varied between two and a half and five times the Group’s WACC, with Man’s beta and the level of performance fee income in the year being the main cause for variation.