When you start investing, it's easy – perhaps a little too easy – to begin by purchasing the biggest companies in Australia. After all, these are household names and familiar businesses. Many experienced investors also like these businesses, and the financial media write about them regularly.
Unfortunately, the feeling of familiarity can be dangerous to 'buy and hold' or 'set and forget' investors – including those that use managed funds or index tracking funds. Below is a chart showing 18 of Australia's 20 biggest companies from the S&P/ASX 20 (INDEXASX: XTL) (ASX: XTL) and whether they have grown Earnings Per Share (EPS) since 2011:
| Company (biggest to smallest) | 2011 earnings per share | 2016 earnings per share | EPS change over time |
| Commonwealth Bank of Australia (ASX: CBA) | 438.7 | 542.5 | +23.6% |
| Westpac Banking Corp (ASX: WBC) | 233 | 224.6 | -3.7% |
| Australia and New Zealand Banking Group (ASX: ANZ) | 208.2 | 197.4 | -5.2% |
| National Australia Bank Ltd. (ASX: NAB) | 233.6 | 242.4 | +3.7% |
| BHP Billiton Limited (ASX: BHP) | 393.5 | 22.8 (120.7 in 2015) | -94.3% |
| Telstra Corporation Ltd (ASX: TLS) | 26.1 | 31.6 | +21% |
| CSL Limited (ASX: CSL) | 174 | 268.9 | +54.5% |
| Wesfarmers Ltd (ASX: WES) | 166.7 | 209.5 | +25.6% |
| Woolworths Limited (ASX: WOW) | 174.6 | 63.6 | -64% |
| Macquarie Group Ltd (ASX: MQG) | 282.5 | 619.2 | +119.1% |
| Rio Tinto Limited (ASX: RIO) | 303.5 | 256.9 | -15.4% |
| Woodside Petroleum Limited (ASX: WPL) | 190 | 104 | -45.3% |
| Transurban Group (ASX: TCL) | 7.8 | 5 | -36% |
| QBE Insurance Group Ltd (ASX: QBE) | 64.7 | 61.6 | -4.8% |
| Suncorp Group Ltd (ASX: SUN) | 35.6 | 81.4 | +118.6% |
| Brambles Limited (ASX: BXB) | 32.9 | 37.3 | +13.3% |
| Insurance Australia Group Ltd (ASX: IAG) | 12.08 | 25.79 | +113.4% |
| AMP Limited (ASX: AMP) | 26.3 | 16.4 | -37.8% |
(All the figures above are basic earnings per share taken from company annual reports. On several occasions in which impairments were particularly severe I used underlying instead of statutory results to better reflect ongoing profitability. Scentre Group (ASX: SCG) and Westfield Corp Ltd (ASX: WFD) were excluded because the companies drastically changed structure when they separated, and their results are non-comparable.)
Now, this isn't a perfect analysis – far from it. It excludes dividends, which are a big contributor to an investor's total returns. It does not account for how much cash a company earned or any acquisitions it made, although it does account for the number of shares on issue. Either of the years selected could have been unusually good or bad, or included a single bunch of write-downs from investments made over multiple previous years, which would also prejudice the results.
What we can see though is that buying the biggest names doesn't guarantee winning returns. Each of the above businesses is among the biggest of its type in Australia, and more than half don't have meaningful overseas opportunities. This suggests that earnings growth will remain modest in the future, and many of the above businesses are cyclical. This is something to keep in mind when you're considering which share to buy next.
