Big Rewards, Small Packages: Here’s How Shrinking Companies Could Grow Your Portfolio

Big Rewards, Small Packages: Here’s How Shrinking Companies Could Grow Your Portfolio
Theodora Lee Joseph, CFA

3 months ago1 min

You want your portfolio’s value to grow, that’s a given. Problem is, it’s getting harder to find the companies that can deliver what you’re after. McKinsey & Co analyzed 3,000 of the world’s biggest companies, and only 10% of them were able to consistently improve revenue for at least seven of the last ten years. (That’s why those companies tend to outperform their respective industries when it comes to total shareholder returns (TSR), by an average of at least seven percentage points.) Even emerging markets, which used to be a go-to growth engine, are flatlining

Broadly speaking, a lethargic firm can pursue one of two strategies: acquire to grow or shrink to grow. There’s only one right answer. McKinsey research showed while shrinking through divestment is a painful process, it’s often the best technique to generate sustainable long-term growth. In fact, as you can see in the chart above, the companies that outperformed on TSR were the ones that had divested businesses. That checks out: divesting non-core businesses can often free up capital that a company can use on focused growth plans.

Be wary of companies that refuse to slimline, instead snapping up other companies to scale up. Unless a firm has a track record of making successful acquisitions, most deals tend to dilute returns – especially for shareholders. As for current examples of beefy deals, think of BAE’s proposed acquisition of Ball Aerospace or Tapestry’s proposed acquisition of Capri.

The takeaway: it’s brave to get lean. Most firms will fear shrinking, not least because paychecks are often tied to revenue, not profit. But if you’re in the market for long-term rewards, the little guys could have the biggest chance.



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