SOURCE: The Boston Consulting Group

The Boston Consulting Group

October 13, 2009 00:01 ET

Long-Term Sustainability of Performance Is the Key to Success in Postcrisis Capital Markets, Says Report by The Boston Consulting Group

Apple, Samsung Electronics, E.ON, Tesco, and McDonald's Are Among BCG's Top 25 'Sustainable Value Creators' That Have Beaten Their Peers Over the Past Decade

BOSTON, MA--(Marketwire - October 13, 2009) - Companies suffering a massive decline in stock market valuation in the wake of the global economic crisis should learn the lessons of an elite group of so-called sustainable value creators that have generated sizable and sustainable shareholder returns over a decade, according to a new report by The Boston Consulting Group (BCG).

In "Searching for Sustainability: Value Creation in an Era of Diminished Expectations," the eleventh annual report in its Value Creators series, BCG identifies 25 companies with a market capitalization of at least $30 billion that have consistently outperformed their local stock-market average during the 10 years from 1999 through 2008.

These include Apple, Samsung Electronics, Tesco, McDonald's, and Procter & Gamble, as well as several less-known but highly successful companies -- such as Gilead Sciences, a U.S. drug company, which is ranked in first place; Vale, the Brazilian commodities producer; Reliance Industries, the Indian chemicals giant; Teva, the Israeli generic-drug manufacturer; Novo Nordisk, a Danish pharmaceutical company; and German energy company E.ON, a leading player in European power and gas.

In addition to the 25 sustainable value creators, this year's report presents a detailed analysis of the shareholder returns of 694 companies across 14 major industries for the five-year period from 2004 through 2008. It identifies the top ten value creators worldwide and in each of the industries. Among the key findings:

-- The average annual total shareholder return (TSR) in this year's sample was an anemic 2.9 percent -- and in 5 of the 14 industry samples, the average TSR was actually negative. This poor performance reflects the precipitous decline in market values in late 2008 owing to the financial crisis.

-- The big industry winner in this year's rankings was the utilities sector, with an average annual TSR of 10.9 percent. Although sales growth in the sector was only average, utilities companies had the highest dividend yield of all industries -- 4 percent. When the impact of debt reductions and share repurchases in the sector is taken into account, distributions of free cash flow accounted for a full five percentage points of TSR -- nearly half the industry average.

-- What's more, utilities was the only sector to actually see multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) grow, on average. Clearly, the sector's ability to generate and pay out cash played a major role in its success and perhaps even served to put a floor under industry valuation multiples at a time when in every other industry and in the sample as a whole, declines in EBITDA multiples destroyed TSR.

-- In every industry, the top ten companies not only substantially outperformed their own industry average but also beat the overall sample average -- by more than four 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."

Lessons from the Sustainable Value Creators

The main focus of this year's report, however, is on performance over an even longer time frame. The experience of the 25 sustainable value creators suggests four distinct pathways to long-term outperformance, each with its own preconditions, necessary management disciplines, and potential pitfalls:

-- Growth Engines that consistently deliver sales growth well above the GDP average -- usually 15 percent per year or more

-- Cash Machines that emphasize generating cash through margin improvement and the direct payment of free cash flow to shareholders in the form of dividends and share repurchases or to debt holders by paying down debt

-- Portfolio Migrators that systematically refashion the mix of their business portfolio over time through acquisitions and divestitures in order to move into businesses and markets with greater value-creation potential

-- Value Impresarios that use some combination of all these approaches, shifting their emphasis to the one that has the most potential to exceed investor expectations at any moment in time

"Choosing the right pathway must take into account a company's starting point in the capital markets, its competitive position, and the evolving dynamics of its industry," said coauthor Eric Olsen, a senior partner in BCG's Chicago office. "And over time, a company must be prepared to change its approach as its circumstances change."

The Continuing Relevance of Shareholder Value

At a time when precipitous declines in valuation and high volatility in stock prices have caused some senior executives to question the principle of managing for shareholder value, the report also makes a strong case that the concepts and tools of shareholder value management are more important today than ever.

"It is precisely in times of high uncertainty that companies have to make carefully targeted bets," said coauthor Daniel Stelter, a senior partner in BCG's Berlin office and global leader of the firm's Corporate Development practice. "Recessions typically accelerate the forces reshaping industries and create new winners and losers in the struggle for competitive advantage. In addition to being a critically important way of measuring company performance, value management sets an essential context for corporate decision making. It's the only way to assess and evaluate unlike businesses in the portfolio, weigh the potential tradeoffs and risks among different strategic moves, and in the end optimize total business performance."

"Searching for Sustainability" provides executives with a road map for sustainable outperformance at a time when more and more investors are on the lookout for companies with a long-term track record and a credible plan for delivering value not just this year or the next but for many years to come.

To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 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. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.