Each year the Boston Consulting Group (BCG) releases a study which seeks to identify companies that create value for shareholders. Value is measured by total shareholder returns (TSR), which are the sum of the share price gain and dividends. The true value creators of course are the ones which produce sustainable TSR over many years. One way that BCG keeps a check on this is with reference to the fundamental value of a company which it determines based upon a firm’s return on equity.
The results of the study, which captures a 10-year period from 2003 to 2013, identified 13 companies which BCG classified as sustainable value creators including Computershare Limited (ASX: CPU), Sydney Airport Holdings Ltd (ASX: SD) and Ramsay Health Care Limited (ASX: RHC). While all 13 stocks could make worthy long-term portfolio holdings based upon their ability to sustainably create value, BCG singled out three for closer attention.
1) CSL Limited (ASX: CSL)
The biopharmaceutical company has excelled and should continue to do so thanks to a number of practices identified by BCG. These practices include CSL’s commitment to reinvest to support differentiation; management of its portfolio of assets including the divestment of low return assets; and building a diversified revenue stream.
2) REA Group Limited (ASX: REA)
The online classified real estate company has many strings to its bow. BCG highlighted its ability to consistently invest in R&D and innovation; pursue adjacencies; and its ability to establish a strong commercial presence as being amongst major reasons for its continued success.
3) Monadelphous Ltd (ASX: MND) has made a number of adept decisions which according to BCG have provided long-term returns for shareholders. BCG pinpointed Monadelphous’ decision to evolve according to customer needs; establish demand stickiness through network effects, switching costs and cross-product synergies; and pursuing disciplined M&A and organic growth as important determinants of the contractor’s success.
It is essential to be forward looking as an investor – not backwards looking. As Warren Buffett would say – If past history was all there was to the game, the richest people would be librarians. So while it is not enough to extrapolate the past into the future, an above average operating history can suggest that a company enjoys an economic moat which means the company should outperform in the future.