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 "Threading the Needle: Value Creation in a Low-Growth Economy" found that of the 142 companies included in this year’s global and industry rankings, 81 are located in developing economies—57% of the total.
Even more dramatic, the Top 10 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.
The study also found that seven of the top ten large-cap value creators (those with market valuations of more than US$35 billion) are listed on stock exchanges in rapidly developing economies as well—Brazil, Hong Kong, India, Mexico, and South Korea.
“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 average annual total shareholder return (TSR) for the 712 companies in the database was 6.6%—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%) 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%. 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%—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
According to the BCG report, 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 also identifies three priorities for value creation strategy in a low-growth environment, and they are target value-creating growth; rethink capital deployment; and explore alternative scenarios for value creation.