Investors who deal intensively with the stock market are always looking for stocks whose value continues to rise over long periods of time. The “value creators” ranking provides guidance in the search for exactly those kinds of stocks.
The list with the best value creators has been published every year since 1999 by the Boston Consulting Group (BCG). The ranking is determined on the basis of Total Shareholder Return (TSR) over the previous five years.
According to the Boston Consulting Group, TSR measures the combination of share price gains and dividend yield for a company’s stock over a given period. The management consulting firm believes it is the most comprehensive metric for performance in shareholder value creation. Thus, the firm defends the TSR against criticism that it would be a time frame–dependent metric and that a company’s TSR performance would depend on the starting point and the length of the period measured. According to the management consulting firm, the TSR – and especially the relative TSR – is valuable because it reflects shareholders’ true bottom line, which is the total return they receive from the moment they buy the stock.
Attractive returns from tech, media, telecoms
The 2017 rankings reflect an analysis of TSR at approximately 2,350 companies worldwide (of which some 30 percent are U.S. based) from 2012 through 2016. In these rankings, U.S. companies again dominate the list of the world’s top value creators, taking six of the top 10 spots for global large-cap companies. Technology, media and telecommunications have replaced the pharmaceuticals industry as the primary value-driving sectors in the top 10. Technology, media and telecommunications companies hold down seven places on this year’s list, while pharma, which claimed four of the top 10 slots in 2016 (including the top three) and five in 2015, is absent.
“Companies such as Amazon and Netflix from high-growth technology fields are the clear winners in the ‘Value Creators’ ranking, but growth alone is not enough to be future-oriented,” explains Axel Roos, senior partner at BCG and one of the study’s authors. “The key is that companies are expanding their business portfolios with new, profitable business models while at the same time flexibly adapting their strategy as well as their capital allocation.”
In addition to providing the large-cap ranking of five-year TSR at the world’s 200 largest companies by market valuation, the 2017 Value Creators rankings include the top 10 value creators in 32 industry sectors. The top 10 large-cap value creators for the years 2012 through 2016 delivered an impressive average annual TSR of 41 percent. By way of comparison, the average annual TSR for the next 10 best companies was a still impressive 29 percent. The overall average annual TSR for all of the companies in this year’s value creators database was 16 percent, well above the long-term average of about 10 percent for the S&P 500.
Among industry sectors, mid-cap pharma ($4 billion to $17 billion in market cap) ranks first in average value creation, as it did last year. Other top-five sectors are consumer durables, automotive components, financial infrastructure providers, and medical technology. (See Charts 1 and 2.)
A look at 20-year TSR success stories
In addition to assembling the five-year rankings, BCG looked at long-term and consistent value creation. From 1996 through 2016, nine companies among the largest 200 were top-quartile value creators in at least three of the four years in a five-year period. They top the consistent value creators list for the past two decades because they generated average annual TSR numbers of 17 percent to 32 percent over 20 years. The list of Value Creators with the highest TSR over the past 20 years is topped by U.S. pharmaceutical companies Celgene and Gilead Sciences. Two others are tech firms and two are tobacco companies. One comes from media and publishing, and one from healthcare. Amazon straddles tech and retail. Seven are based in the U.S., one in the Netherlands, and one in South Africa.
A notable conclusion from the rankings is that growth- and non-growth-companies can make the cut. Celgene and Gilead Sciences, for example, have ridden blockbuster-producing research and development programs to dizzying heights, and along the way they also used mergers and acquisitions strategically to reinforce their innovation efforts. They have managed to outperform even the outsize expectations that fairly consistently become priced into such companies, BCG concludes.
Two other top companies, Altria and Reynolds American, have taken a very different approach. They have hardly grown at all. Both are in the tobacco industry, which has long been in decline, but they have managed to beat expectations and expand margins (largely by raising prices). Further, they have consistently returned cash to shareholders through generous dividend yields, BCG notes.
“For consistent value creators, the strong tailwinds of a growth industry help. But far more important are management’s understanding of different value delivery models, its willingness to adapt its strategy and capital allocation to meet evolving conditions, and its ability to balance short-term targets and longer-term TSR goals,” said Jeff Kotzen, a BCG senior partner. “Regardless of time frame, top performers set their sights on winning in their industry or peer group – and they deliver.”
Adds Gerry Hansell, a BCG senior partner: “The likelihood of beating the market – especially by a wide margin – year in and year out, is low. For companies in mature industries, the challenge is even greater because growth is such an important driver of long-term TSR. That said, companies in mature industries still can drive value creation by improving efficiency, allocating capital prudently and returning cash to shareholders rather than investing it in low-return growth opportunities.”
These views are underscored by the view of Hady Farag, co-author of the study and stock expert at BCG: “Top value creators are characterized above all by the fact that they find the right balance between short-term business requirements and longer-term TSR targets, even under volatile market conditions.” (See Chart 3.)
In addition to the methodology of the “Value Creators” ranking, it should be noted that the ranking of the large caps, measured according to their market valuation, includes the 200 largest companies worldwide. Also in its 2017 study, for the first time, BGC has included “Value Creators” lists for 32 industries with the 10 most profitable companies.