Senior Advisor, Sr. Partner Emeritus
Related Expertise: Value Creation Strategy and Shareholder Activism Defense
In October 2014, The Boston Consulting Group released The Challenge of Growth: the 2014 Australian Value Creators Report. The report analyzes the sources of total shareholder return (TSR) and the changes in investors’ expectations of the ASX 200 companies. In this report, we present our perspective on growth versus dividends—the subject of ongoing debate in the Australian market and a concern that challenges most CEOs and management teams.
Dividend payout ratios have been climbing over the past few years, the result of investors’ enthusiasm for higher equity yields and also the limited number of value-creating growth opportunities. Growth “headwinds”—brought about by, for example, low commodity prices, poor productivity in Australia, and investor sentiments over international expansion—have made it more difficult for Australian executives to find profitable growth opportunities in Australia or abroad. However, unless management delivers growth, the current equity valuations won’t be sustainable, and the equities market will recalibrate share prices. Choosing the right type of growth—growth that meshes with a business’s competitive position and its industry environment—and aligning the growth agenda with investor demands and the financial strategy are critical requirements for long-term success.
The report focuses particularly on organic versus inorganic growth, finding that highly acquisitive growers over the last decade achieved a median annual TSR return of 17 percent, considerably higher than nonacquisitive companies. As businesses are again entering into a phase of high M&A activity, we demonstrate how inorganic growth that is strategically and tactically well executed can be the key to superior value creation. Most important, no matter how difficult it might seem, business leaders must make a hard-headed evaluation to determine where growth will be found, and they must have the conviction to pursue that growth for the sake of their companies and for Australia, too.
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