One side effect of the Great Recession has been to accelerate the ascent of companies from rapidly developing economies to the top ranks of the world’s creators of shareholder value, according to a new report by The Boston Consulting Group (BCG). This is the core finding of Threading the Needle: Value Creation in a Low-Growth Economy, the twelfth annual report in BCG’s Value Creators series.
Starting from a database of more than 4,000 companies worldwide, the report presents detailed analyses of the total shareholder return (TSR) at 712 companies across 14 major industries for the five-year period from 2005 through 2009. It also identifies the top ten value creators overall and in each of the industries studied. Among the key findings:
Of the 142 companies included in this year’s global and industry rankings, 81 are located in developing economies — 57 percent of the total.
Even more dramatic, the top ten value creators in the 712-company sample are all from Asia — five companies listed on stock exchanges in China, two in Hong Kong, and one each in India, Indonesia and South Korea.
Seven of the top ten large-cap value creators (those with market valuations of more than $35 billion) are listed on stock exchanges in rapidly developing economies as well — Brazil, Hong Kong, India, Mexico and South Korea.
Of the 14 major industries covered by the report, only one—pharmaceuticals and medical technology — does not have any companies from emerging markets in its top ten.
“One of the consequences of the Great Recession is that we are now living in what BCG calls a ‘two-speed’ economy,” said coauthor Daniel Stelter, a senior partner in BCG’s Berlin office and the global leader of the firm’s Corporate Development practice. “Most developing economies are rebounding relatively quickly to their precrisis growth levels. In contrast, developed economies are entering an extended period of below-average growth — with profound implications for how companies create value and which companies come out on top.”
Trends in Value Creation
The report also discusses other findings from BCG’s analysis of this year’s Value Creators database.
The average annual TSR for the 712 companies in the database was 6.6 percent—and in 3 of our 14 industry samples, TSR was actually negative, on average, during the past five years. This relatively poor performance (considerably below the long-term historical average of approximately 10 percent) reflects the precipitous decline in market values in late 2008 owing to the global financial crisis—a decline that the rebound in 2009 equity values only partly recovered.
The big industry winner in this year’s rankings is the mining and materials sector, with a weighted average annual TSR of 18 percent. This performance is a function of the rise in commodity prices during the 2005–2009 time period, driven in part by rapid development in emerging markets. In second and third place are the chemicals industry and the machinery and construction industry.
The leading companies in the sample substantially outpaced not only their own industry average but also the total sample average. For example, the average annual TSR of the global top ten—75 percent—was more than 11 times greater than that of the sample as a whole. The top ten companies in each industry outpaced their industry averages by between 13.2 percentage points (in pulp and paper) and 34.5 percentage points (in machinery and construction). And in every industry we studied, the top ten companies also did substantially better than the overall sample average—by at least 6.6 percentage points of TSR.
“The lesson for executives is clear,” said coauthor Frank Plaschke, a partner in BCG’s Munich office. “Coming from a sector with below-average market performance is no excuse. No matter how bad an industry’s average performance is relative to other sectors and to the market as a whole, it is still possible for companies in that industry to deliver superior shareholder returns.”
The Impact of Low Growth on Value Creation
In addition to analyzing TSR rankings, Threading the Needle also explores the implications of below-average economic growth for value creation at companies that mainly do business in the developed world.
Capital gains will become a relatively less important source of TSR as lower GDP growth puts pressure on corporate revenues and profits, and average valuation multiples decline as investors reset their future growth expectations. Meanwhile, declining multiples means that the yield from payouts of free cash flow will increase, making direct payments to shareholders in the form of dividends or stock repurchases relatively more important.
“This shift in the composition of TSR means that there will be opportunities for some companies to achieve above-average shareholder returns by emphasizing cash payout,” said coauthor Eric Olsen, a senior partner in BCG’s Chicago office. “But the big winners will be those companies that manage to increase cash payouts even as they deliver above-average profitable growth in what is a much tougher and more competitive economic environment.”
The report identifies three priorities for value creation strategy in a low-growth environment.
Target value-creating growth. Because achieving profitable growth is going to be more difficult, companies will need to take a tough look at existing business plans so as to weed out those growth investments that do not create value and focus only on those that do.
Rethink capital deployment. As direct payments to shareholders become more important, companies may also have to question some legacy assumptions—for example, the preferability of share buybacks over dividend increases.
Explore alternative scenarios for value creation. By creating alternative future scenarios that emphasize different uses of capital, a company can assess critical tradeoffs and define the most appropriate path for optimizing its value-creation strategy.
To receive a copy of the report or arrange an interview with one of the authors, contact Eric Gregoire at 617-850-3783 or gregoire.eric@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. It partners with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. BCG's customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. Founded in 1963, BCG is a private company with 69 offices in 40 countries.