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, released by The Boston Consulting Group (BCG). Two Asian companies—China’s Tencent (ranked 7) and Japan’s KDDI (9)—and South Africa’s Naspers (4) make up the rest.
Based on an analysis of total shareholder return at approximately 2,000 companies worldwide from 2011 through 2015, the 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%. The median average annual TSR for the 28 industry sectors ranged from a high of 27% (in mid-cap pharma) to a low of negative 14% (in mining). By 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. 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, with South African media company Naspers taking the number four spot, Chinese social media powerhouse Tencent at number seven, and Internet TV network Netflix at 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).
Five of the companies in the large-cap top ten are appearing on the list for the first time: Regeneron, Netflix, Visa, KDDI, and MasterCard. 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.
Top Performance: Hard to Achieve, Even Harder to Sustain
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, they 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. 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 maintain top performance? “Over time, companies tend to ‘fade’ to average market performance,” said Jeffrey Kotzen, BCG senior partner and global leader of the firm’s Shareholder Value practice. “To become a top value creator—the kind that wins a place in our top ten rankings—a company must massively exceed investors' expectations. I don’t mean simply beating earnings estimates by a point or two in a single quarter. I mean delivering results that fundamentally transform the trajectory of the business. And to stay on the list, it needs to do so over and over again.”
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. “It’s in the nature of capital markets to continually reset a company’s starting point,” said Frank Plaschke, a partner in BCG’s Munich office and a core member of the firm’s Corporate Development practice. “As investor expectations for future performance get baked in to a company’s current stock price, a company needs to find new ways to exceed, not just meet, those expectations. Otherwise, its future TSR is likely to remain flat.”
Implications for Senior Executives
The difficulty in sustaining superior value creation has two critical implications for senior 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.
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.