Ranking CEO Wealth Creation
October 30 2013 by Drew Morris, Michael Burdi and Chris Austin
Our ranking is based on the performance of companies in the S&P 500 Index (and their CEOs) for the three years ending on June 30, 2013. It considers reported financial results during that period and estimates for the next 12 months. Only companies with CEOs who were in their roles for the entire July 2010 through June 2013 period were ranked. Not ranked are the 15 REITs in the 2013 S&P 500, as well as News Corp. and Sprint, the data for which was unavailable due to a pending corporate spin-off and an acquisition, respectively. The four components of the ranking, explained below, were developed and calculated by the Applied Finance Group (AFG), an independent equity-research advisory firm, using their proprietary metrics and data. A proprietary weighted combination of each company’s component rankings, taking into account the industry the company is in, is used to produce an overall score: 100 is awarded to the best wealth creator; 1 to the worst. (The list itself shows these overall scores as a sequential ranking.) The component rankings are shown as letter grades with companies in the top 20 percent of each component metric receiving an A grade; the bottom 20 percent receiving an F.
Market (or Enterprise) Value/Invested Capital (MV/IC)
This measure shows the degree to which investors consider the company’s assets valuable, relative to their cost. Market value is what a buyer would have to pay to buy the company outright, that is, to purchase all of the stock and pay off all of the loans, leases and other obligations. Note that market value depends on the stock price. Invested capital is the inflation-adjusted total of all of the investments in the business. It does not depend on the stock price. So by its nature, MV/IC reflects the market’s take on the value of the investments made in the business.
The Average of the Past Three Years’ Economic Margins
Economic Margin (EM) measures the return a company earns above or below its risk-adjusted cost of capital. Riskier businesses are accorded relatively higher capital costs. EM is defined as (Operating Cash Flow—Risk-Adjusted Capital Charge)/Productive Capital. Productive Capital consists of the cash-flow generating assets, excluding goodwill and intangibles. Companies with positive EM (greater than 0 percent) are creating wealth; those with negative EM are destroying it. To learn more about the economic-margin framework visit EconomicMargin.com.
This is a 12-month forecasted EM, based on the ratio of the most recent EM to the 3-year average.
This AFG-proprietary measure rewards a company with positive EM for growing its asset base and penalizes one with negative EM for doing the same thing. In other words, if a company is making money and it adds assets in such a way that it can make even more, that’s good. So is selling off a money-losing division. That said, it’s also valid that adding scale can dramatically increase profitability in a business with high fixed costs.
The top 50 companies in the ranking delivered an average Total Shareholder Return (TSR) of 124.78 percent between January 2010 and June 2013 (the period covered in the reported financials). The bottom 50 companies’ TSR averaged 29.3 percent, while the S&P 500’s actual was 44 percent (without its 15 REITs). The top 50’s median TSR was 112.10 percent; the bottom 50’s was 28.2 percent.
As the table at above shows, the top 50 companies in the wealth-creation ranking far outperformed the bottom 50 companies and the S&P 500 between July 2010 and June 2013. Note: Total Shareholder Return = share-price return percent plus reinvested dividends, expressed as a percent. For more on Economic Margin and how companies scored, see www.economicmargin.com/moreinfo.htm.
Chris Austin (Director), The Applied Finance Group TM, Ltd (AFG).
Michael Burdi (Senior Analyst), The Applied Finance Group TM, Ltd (AFG)
AFG is a Chicago-based independent equity research advisory firm specializing in performance and valuation measurement using Economic Margin. Disclaimer: AFG, its owners, employees and/or customers may have positions in the securities listed in this article. The information provided is based on material AFG believes to be accurate and reliable, however, its accuracy and completeness, and conclusions derived there from, are not guaranteed.
For more information regarding the Wealth Creation Index rankings email email@example.com.