CEO magazine recently released its second annual Wealth Creation Rankings, a list of the best and worst wealth creators over the last three years in the S&P 500. Number one on the list is credit card brand MasterCard (NYSE:MA). Last on the list is power generation company, Dynegy (NYSE:DYN). The article that accompanies the rankings explains the concept of economic margin, which the authors define as operating cash flow less an appropriate capital charge divided by invested capital, and how it is a much truer indicator of value than standard metrics like earnings per share and return on capital.
This may very well be true. Esoteric ideas such as this one, that peak the interest of investors and intellectuals alike, come along periodically. You need to tread carefully when reading them; they don't always lead to the promised land.
Wealth Creator: Not
Number two on the wealth creator list is Federated Investors (NYSE:FII). According to its authors, Federated's average economic margin for the last three year's is 20.6%. It considers anything above zero to be wealth creation, and anything below it wealth destruction. It's safe to assume then that at 20.6%, it is creating wealth. But whose wealth are we talking about? The article provides a rather convincing table that shows the top 50 wealth creators on its list delivered average shareholders returns, between June, 2006 and June, 2009, of 48.3% vs. an 11% drop for the bottom 50.
Being in the second spot, you'd assume that Federated's total shareholder return would be exceptional. It isn't. In fact, it lost 16.8% for shareholders over the last three years. Then who's the beneficiary of this supposed wealth creation? The Donahue family is. It holds all 9,000 class A shares in the company, which are the only ones with voting privileges. Controlling the board with just 9.4% of the class B stock, the Donahue clan occupies the top three jobs at the company, receiving $30 million in total compensation in the last three fiscal years. That's wealth of the wrong kind. (Learn about voting privileges in Knowing Your Rights As A Shareholder.)
Wealth Destroyer: Not
Number two on the list of wealth destroyers is Timothy Smucker, CEO of Ohio-based food products company Smucker's (NYSE:SJM). Its stock grew 17.6% over the same three-year period, 34.4% better than Federated, yet it sits second from the bottom. At the end of the article, the authors suggest that in order to move up in the rankings, a company must avoid overpaying for acquisitions. At the same time, it suggests the ability to sense opportunities and jump on them is critical to wealth creation.
If that's the case, the authors must obviously feel Smucker's $2.95 billion purchase from Procter & Gamble (NYSE:PG) in June 2008 of its Folger's coffee brand was way too generous, because it's certainly helped transform the company into a more diversified food business. In its latest fiscal year, ended April 30, its coffee sales were almost three-times its jams and jellies. I'm not sure what else Tim Smucker could do to create any more value in the company than he already has - this ranking is way off the mark. (For more information on acquisitions, see Analyzing An Acquisition Announcement.)
The Bottom Line
Lists like the one are a lot like awards shows; they're very subjective and often wrong. Investing isn't something that fits into a neat little box. However, examining different views on the subject will certainly make you a better investor. Continuous learning is key.
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