Maintaining financial flexibility and low cost of capital

The Group’s finance strategy builds on the principles and aims of financial management. In addition to the interests of shareholders, the strategy also takes lender requirements into account. The goal is for the Group to maintain its financial flexibility and low cost of capital by ensuring a high degree of continuity and predictability for investors.

A key component of this strategy is a target rating of “BBB+”, which is managed via a dynamic performance metric known as funds from operations to debt (FFO to debt), calculated on a rolling 12-month basis. Our strategy additionally includes a sustained dividend policy and clear priorities regarding the use of excess liquidity, which will initially be used for investing in the operating business and to fund a portion of our pension liabilities. Once this has been achieved, we would aim to improve our rating to “A–” before using liquidity for additional dividend payments or share repurchases.

Funds from operations (FFO) represents operating cash flows before changes in working capital plus interest and dividends received less interest paid and adjusted for operating leases, pensions and non-recurring income or expenses, as shown in the following calculation. In addition to financial liabilities and available cash and cash equivalents, the figure for debt also includes operating lease liabilities as well as unfunded pension liabilities.

A.23 FFO to debt
€m
		2010		2011
Operating cash flow before changes in working capital		2,109		2,234
Interest and dividends received		59		72
Interest paid		183		163
Adjustment for operating leases		1,055		1,104
Adjustment for pensions		198		153
Non-recurring income/expenses		531		208
Funds from operations (FFO)		3,769		3,608
Reported financial liabilities		7,022		7,010
Financial liabilities related to the sale of Deutsche Postbank AG		4,164		4,344
Financial liabilities at fair value through profit or loss		115		137
Adjustment for operating leases		5,527		5,295
Adjustment for pensions		5,323		5,639
Surplus cash and near-cash investments1		2,893		2,286
Debt		10,700		11,177
FFO to debt (%)		35.2		32.3

FFO to debt declined versus the prior year, primarily due to the decrease in our liquidity as a result of higher capital expenditure. Funds from operations also decreased slightly in the reporting year.