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Tue, Dec 29, 2009 - Page 10 News List

Best CEOs taking smallest gains in 25% S&P 500 rally


Brown-Forman Corp’s Paul Varga and Johnson & Johnson’s William Weldon are among chief executive officers left behind in this year’s stock-market rebound even after they created the most value for their companies.

Brown-Forman, the maker of Jack Daniel’s whiskey and Southern Comfort liqueur; J&J, the world’s biggest health-products company; and 30 other Standard & Poor’s 500 Index companies rallied less than 10 percent this year as their managers posted better-than-average sales and efficiently invested capital, data compiled by Bloomberg show. Companies with the biggest stock gains had among the lowest scores in a ranking known as economic value added.

Money managers ignored profitability to snap up stocks that dropped the most in the credit crisis, leaving opportunities for value investors next year, Raiffeisen Capital Management and Credit Andorra said. They’re buying this year’s laggards, betting companies with the highest returns on shareholders’ capital will be rewarded as the US Federal Reserve prepares to raise interest rates and the government removes stimulus.


Fewer than 215 companies in the S&P 500 created value last year as the US economy experienced the worst contraction since the Great Depression, showed data compiled by Bloomberg based on consulting firm Stern Stewart & Co’s EVA model. Their so-called return on invested capital exceeded the cost of funding their operations, the economic value added data show.

Thirty-two of those companies are projected to increase sales or report a smaller drop than the 5.9 percent median for the S&P 500 this year, while posting an equity-market advance that trailed 10 percent, Bloomberg data show. Shareholders missed out as the benchmark index for US stocks rose 25 percent last year and 67 percent during the past nine months, the most in seven decades, after the government lent, spent or guaranteed more than US$11 trillion to end the financial crisis.


EVA, also known as economic profit, is a more reliable gauge of management performance because it treats the price of intangible assets such as research as an investment, while measuring all returns against the cost of raising money for the business, Stern said.

The argument that “earnings per share is a driving force on value fails in the face of actual evidence,” he said. “It’s not earnings or dividends that create value, but economic performance.”

Varga posted a return on invested capital of 15 percent during the past year at Brown-Forman, data compiled by Bloomberg showed. That beat the Louisville, Kentucky-based company’s so-called cost of capital by 7.8 percentage points.


J&J exceeded its cost of capital by 9.3 percentage points in the past four quarters. The company, based in New Brunswick, New Jersey, has beaten the analyst profit forecast 14 straight quarters and CEO Weldon said on Nov. 3 that he will fire more than 7,000 ­workers to eliminate layers of management to free up money to invest in more profitable businesses. The shares rose 8.1 percent this year.

Procter & Gamble Co, the world’s biggest consumer-­products company, reported first-quarter profit on Oct. 29 that fell less than analysts estimated and raised its full-year forecast for sales growth. The stock lost 0.9 percent this year.

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