Managing Director & Senior Partner
US companies dominate the list of the world’s top value creators, taking seven of the top ten spots for global large-cap companies in the 2016 Value Creators rankings, just released by The Boston Consulting Group.
Since 1999, BCG has published annual rankings of top value creators based on total shareholder return over the previous five-year period. The 2016 rankings are based on an analysis of TSR at approximately 2,000 companies worldwide from 2011 through 2015. (See the sidebar, “The 2016 BCG Value Creators Database.”)
TSR measures the combination of share price gains and dividend yield for a company’s stock over a given period. It is the most comprehensive metric for performance in shareholder value creation. Average annual TSR is the amount of TSR that a company delivers, on average, each of the five years in our analysis. The average annual TSR for the median company in this year’s Value Creators database was 12.2%. In contrast, the top ten large-cap value creators delivered average annual TSR of at least 34.7%.
For the second year in a row, biopharma companies lead the global large-cap rankings, taking four of the ten slots, including the top three. (See Exhibit 1.) The number one large-cap value creator is Regeneron Pharmaceuticals, which delivered an average annual TSR of 75.3%, more than 30 percentage points greater than that of the number two company, Allergan. Gilead Sciences comes in at number three, and Biogen rounds out the group of biopharma companies in the top ten, at number six.
Media and publishing companies also put in a good showing: South African media company Naspers took the number four spot, Chinese social media powerhouse Tencent is number seven, and Internet TV network Netflix is number eight. The remaining companies in the large-cap top ten are US electronic-payments processors Visa and MasterCard (numbers five and ten, respectively) and Japanese communication service provider KDDI (number nine).
As part of the annual Value Creators rankings, BCG publishes top ten tables in 28 industries. Exhibit 2 shows the median annual average TSR by industry, as well as the highest and lowest performances in each.
The results suggest that many of the companies in the large-cap top ten benefited from being in industries that enjoyed strong tailwinds in the five-year period under study. The large-cap pharma sector had the second-highest median average annual TSR; media and publishing came in fourth. Still, some companies made the large-cap top ten despite an industry median far closer to the total-sample median—for example, Visa and MasterCard in the technology sector delivered TSRs more than double the median of their sector, and KDDI in communication service providers delivered a TSR more than triple the median of its sector.
Another striking characteristic of the data in Exhibit 2 is the wide gap between the best and the worst performance in each industry. Moreover, the top company in each sector outperformed the industry median by anywhere from 17 percentage points (in the insurance and banking sectors) to as much as 63 percentage points (in the automotive sector).
These findings suggest that companies cannot use their sector’s below-average performance as an excuse for their own. No matter how an industry stacks up to others and to the market as a whole, companies in that industry can deliver superior shareholder returns.
Further analysis of this year’s ranking of large-cap value creators reveals some interesting patterns. For example, five of the companies are appearing on the list for the first time. Regeneron, Netflix, Visa, KDDI, and MasterCard are all newcomers to the large-cap top ten. Meanwhile, three companies—Allergan (the successor to Actavis, which acquired Allergan in 2015), Naspers, and Biogen—are appearing in the top ten for the second time; and one, Gilead, for the third. The only company on this year’s list that has appeared in our large-cap rankings for more than three years is Tencent, which has made the top ten for six years and five in a row from 2010 to 2014.
That kind of consistency is exceedingly rare. As difficult as it is to achieve top performance, maintaining it is even more difficult. In the 18 years BCG has been publishing the Value Creators rankings, 89 companies have made it into the large-cap top ten. More than half, however—a total of 46 companies—have done so only in a single five-year period. In other words, those companies broke into this select group only to disappear from it in subsequent years.
Only 19 companies (roughly 21% of the total) have appeared in the top ten rankings for three years or more. (See Exhibit 3.) The only company to surpass Tencent’s staying power has been Apple, which first appeared in the large-cap top ten in 2006 and stayed on the list for the next eight years; however, the company has not appeared in the top ten since 2014.
Why is it so difficult to sustain top performance? Over time, companies tend to “fade” to average market performance. Avoiding that outcome is extremely challenging.
To become a top value creator—the kind that wins a place in our top ten rankings—a company must massively exceed investors’ expectations. We’re not talking about beating earnings estimates by a point or two in a single quarter. We are talking about delivering results that fundamentally transform the trajectory of the business.
This year’s number one large-cap value creator, Regeneron, is a classic example. Regeneron is a drug discovery rocket ship in a vertiginous takeoff, thanks to its distinctive technique of placing segments of human DNA in mice and using the genetically engineered animals as a platform for the rapid (and, therefore, relatively cheap) development of medications that work in humans.
During the 2011–2015 period, Regeneron achieved a major breakthrough. The company had been regularly losing money as it ploughed nearly half its earnings back into R&D. It reported a loss of $222 million in 2011. But since the introduction that year of its first blockbuster drug, Eylea (a treatment for the most common causes of adult blindness), the company’s revenue has grown tenfold, and net profit in 2015 was $680 million. The strength of Regeneron’s drug discovery pipeline has led investors to push the company’s stock price to nearly 50 times earnings, an extraordinary valuation multiple.
It is in the nature of capital markets, however, to continually reset a company’s starting point. According to consensus estimates, Regeneron should roughly double its earnings by 2018. But if the company’s current stock price already reflects those earnings, then its P/E ratio would be cut in half by 2018, to about 25 times earnings, as the company develops as expected. Regeneron’s stock price would therefore remain flat, even with the estimated doubling of earnings. Unless the company can find a way to exceed, not just meet, investors’ expectations once again, it is unlikely to deliver the kind of TSR it has during the past five years.
It’s not impossible for a company to “beat the fade” to average performance, but it is a high-wire act that is difficult to sustain. Apple is the exception that proves the rule. A decade of product and business model innovation that brought the world the iPod, the iTunes online music service, and the iPhone transformed Apple from a niche player in the low-growth and low-margin computer business into a consumer electronics juggernaut, putting the company at the center of a market approximately 30 times the size of its original market and fueling a decade of exceptional shareholder returns. But now that Apple is a $540 billion behemoth, the company faces the difficult challenge of finding new areas of growth that can sustain its TSR trajectory. Current top performer Tencent, which has increased its market valuation nearly fivefold—from about $39 billion to $183 billion—in the six years it has enjoyed top ten status, may face a similar challenge.
The difficulty in sustaining superior value creation has two critical implications for executives. First, as extraordinary as the performance of the top value creators is, it’s important to keep in mind that for many companies, more modest expectations are often entirely appropriate. A company can create a lot of value simply by beating the median TSR of its peer group by a few percentage points per year—what in the 2015 Value Creators report we termed “value creation for the rest of us.” Second, because a company’s value-creation prospects are intimately shaped by its starting point, executives need to continually reconsider their value creation strategy, adapting it to new circumstances and to the company’s evolving position and industry trends.
Throughout 2016, we will share insights from our work on value creation with the world’s leading companies. Among the questions we will be tracking throughout the coming year are the following:
These themes and additional analysis of the 2016 Value Creators rankings will appear in a series of publications culminating in our annual Value Creators report, scheduled for publication in the fall of 2016.