3 months ago • 1 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.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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