Shareholder Value Creation Through Persistent Uncertainty

Each year in its Australian Value Creators Report, The Boston Consulting Group identifies the industries and companies that have created the most shareholder value. We explore how value is created and share the insights we’ve gained on value creation from working with clients of all sizes, in all industries, and in all regions.

This year’s analysis found that despite continued global uncertainty, Australia’s market rebounded well in 2016, supported by a range of industries and driven primarily by profit growth.

Although the S&P ASX 200’s overall one-year total shareholder return (TSR) for 2016 was higher than for 2015, it was slightly lower than the TSR of the US and emerging markets. The ASX 200’s five-year TSR performance was also up from 2015, although it still trailed US, Japanese, and European markets.

When we disaggregated the TSR, we found that profit growth was the primary driver of Australia’s five-year TSR. The contribution of cash flow to TSR was lower in Australia than in Europe or Japan, even though dividends delivered the strongest contribution of all markets. At the industry level, health care led Australia’s major industries again in 2016, and mining and materials experienced a strong rebound.

To understand the drivers of value creation, we studied a subgroup of the ASX 200 that included companies that had been publicly traded for at least five years. The benchmark to achieve top-quartile performance within this subgroup has varied significantly over time, but in 2016, it reached 26%, the highest mark since 2009. This means that companies in the top quartile are outperforming the ASX 200 median by 9%. One or more companies in each industry met this threshold.

Outperforming the market and creating value as a management team are always challenging goals, particularly in such an uncertain environment. A growing number of activist investors—shareholders who assume a proactive and involved approach to growing shareholder value—are using a variety of tools to help management unlock value.

Shareholder activism is growing in earnest in Australia, and the country’s corporate leaders may soon find themselves in a situation similar to that of their counterparts in the US, where approximately 21% of the S&P 1500 has been targeted during the past ten years. Activism is not practiced strictly by agitators with a preference for value creation levers that have little to do with business fundamentals or strategy. Many activists take constructive approaches—based on private discussions—to persuade management to make changes to the business strategy or operating principles.

By adopting the outsider perspective of an activist investor, management can identify components of the business that have the potential for value creation. Management teams can unleash their inner activist by pulling the same levers as an activist investor to generate long-term shareholder value.

In summary, The 2016 Australian Value Creators Report: Shareholder Value Creation Through Persistent Uncertainty confirms that well-managed companies in any industry can produce strong value despite uncertainty. A holistic approach to value creation that addresses three fundamental areas—business strategy, financial strategy, and investor strategy—is critical to creating and sustaining superior shareholder value.

The 2016 Australian Value Creators Report is produced by BCG’s Corporate Development practice.