SCA measures and evaluates profitability in operating activities by monitoring return on capital employed (ROCE). The target for ROCE in the Group has been set at 13% over a business cycle and varies among the business areas based on their different circumstances.
Required rate of return on investments
SCA’s required rate of return on expansion investments shall satisfy the return requirement assigned to each of the business areas. The required rate of return is determined by the capital market’s estimated return requirement on an investment in SCA shares and current long-term interest rates. The return requirement, the weighted average cost of capital (WACC), is based on SCA’s capital structure from a debt/equity ratio of 0.70.
Dividend policy
SCA aims to provide long-term stable and rising dividends. Over a business cycle, approximately one-third of cash flow from current operations (after interest expenses and tax) is normally allocated to dividends. If, in the long term, cash flow from current operations exceeds what the company can place in profitable expansion investments, the surplus shall be used to amortise loans or is returned to shareholders through higher dividends or share repurchases. The Board resolved to propose a dividend of SEK 4.20 for the 2011 financial year, corresponding to an increase of 5% compared with 2010. Accordingly, dividends have risen by an average of 3.7% per year over the past decade.
Capital structure
SCA’s debt/equity ratio, measured as net debt in relation to recognised equity, was 0.60 at 31 December 2011. This was lower than SCA’s longterm target of 0.70. The debt/equity ratio target of 0.70 takes into account SCA’s business risk, the composition of the product portfolio and its substantial forest holdings. Periodically, the debt/equity ratio may deviate from the target. Over the past decade, the debt/equity ratio has varied between 0.44 and 0.70. SCA has a credit rating for long-term borrowing of Baa1/BBB+ and shortterm borrowing of P2/A2 from Moody’s and Standard & Poor’s, respectively, and a short-term credit rating of K1 in Sweden from Standard & Poor’s. For more detailed information about SCA’s financial risk management, see pages 62–63.
Incentive programme
SCA’s incentive programme is designed to contribute to the creation of shareholder value. The programme for senior executives has two components: achievement of cash-flow, growth and earnings targets, which are determined annually by the Board, and the performance of SCA shares compared with an index consisting of SCA’s largest global competitors. For more information about the structure of the programme, see Note 6 (Personnel and Board costs), on page 88.