Working Paper WP-909 February, 2011 SHAREHOLDER VALUE CREATORS IN THE S&P 500: 1991 – 2010 Pablo Fernández Javier Aguirreamalloa Luis Corres IESE Business School – University of Navarra Av. Pearson, 21 – 08034 Barcelona, Spain. Phone: (+34) 93 253 42 00 Fax: (+34) 93 253 43 43 Camino del Cerro del Águila, 3 (Ctra. de Castilla, km 5,180) – 28023 Madrid, Spain. Phone: (+34) 91 357 08 09 Fax: (+34) 91 357 29 13 Copyright © 2011 IESE Business School. IESE Business School-University of Navarra - 1 The CIIF, International Center for Financial Research, is an interdisciplinary center with an international outlook and a focus on teaching and research in finance. It was created at the beginning of 1992 to channel the financial research interests of a multidisciplinary group of professors at IESE Business School and has established itself as a nucleus of study within the School’s activities. Ten years on, our chief objectives remain the same: • Find answers to the questions that confront the owners and managers of finance companies and the financial directors of all kinds of companies in the performance of their duties • Develop new tools for financial management • Study in depth the changes that occur in the market and their effects on the financial dimension of business activity All of these activities are programmed and carried out with the support of our sponsoring companies. Apart from providing vital financial assistance, our sponsors also help to define the Center’s research projects, ensuring their practical relevance. The companies in question, to which we reiterate our thanks, are: Aena, A.T. Kearney, Caja Madrid, Fundación Ramón Areces, Grupo Endesa, Royal Bank of Scotland and Unión Fenosa. http://www.iese.edu/ciif/ IESE Business School-University of Navarra SHAREHOLDER VALUE CREATORS IN THE S&P 500: 1991 – 2010 Pablo Fernández1 Javier Aguirreamalloa2 3 Luis Corres Abstract In the period 1991-2010, the S&P 500 destroyed value for the shareholders ($4.5 trillion). In 1991-1999 it created value ($5.1 trillion), but in 2000-2010 it destroyed $9.6 trillion. The market value of the S&P 500 was $2.8 trillion in 1991 and $11.4 trillion in 2010. We also calculate the created shareholder value of the 500 companies during the 18-year period 1993-2010. The top shareholder value creators in that period have been Apple ($212bn), Exxon Mobil (86), IBM (78), Altria Group (70) and Chevron (67). The top shareholder value destroyers in that period have been American Intl Group ($-217), Pfizer (-188), General Electric (-183), Bank of America (-170), Citigroup (-169) and Time Warner (-130). 41% of the companies included in the S&P 500 in 2004 or 2010 created value in 1993-2010 for their shareholders, while 59% destroyed value. We define created shareholder value and provide the created shareholder value of the 633 companies that were in the S&P 500 in December 2004 or in December 2010 JEL Classification: G12, G31, G32 Keywords: shareholder value creation, created shareholder value, equity market value, shareholder value added, shareholder return, required return to equity 1 Professor, Financial Management, PricewaterhouseCoopers Chair of Finance, IESE 2 Lecturer, Financial Management, IESE 3 Research Assistant, IESE IESE Business School-University of Navarra SHAREHOLDER VALUE CREATORS IN THE S&P 500: 1991 – 2010 In this paper, we quantify shareholder value creation for the companies included in the S&P 500 in the period 1991-2010. We also quantify shareholder value creation for the 633 companies included in the S&P 500 in 2004 or in 2010 for every year in the period 1993-2010. We provide the created shareholder value in the period 1993-2010. 1. Definition of created shareholder value We define shareholder value created following Fernandez (2004, chapter 1). To obtain the created shareholder value, we must first define the increase of equity market value, the shareholder value added, the shareholder return, and the required return to equity. The equity market value of a listed company is the company's market value, that is, each share's price multiplied by the number of shares. The increase of equity market value in one year is the equity market value at the end of that year less the equity market value at the end of the previous year. Shareholder value added is the term used for the difference between the wealth held by the shareholders at the end of a given year and the wealth they held the previous year. The shareholder value added is calculated as follows: Shareholder value added = Increase of equity market value + Dividends paid during the year + Other payments to shareholders (share buy-backs....) - Outlays for capital increases - Conversion of convertible debentures The shareholder return is the shareholder value added in one year, divided by the equity market value at the beginning of the year. Shareholder return = Shareholder value added / Equity market value. The required return to equity is the sum of the interest rate of long-term Treasury bonds plus a quantity that is usually called the company's risk premium and which depends on its risk. Required return to equity = return of long-term treasury bonds + risk premium IESE Business School-University of Navarra A company creates value for the shareholders when the shareholder return exceeds the share cost (the required return to equity). In other words, a company creates value in one year when it outperforms expectations. The created shareholder value is quantified as follows: Created shareholder value = Equity market value x (Shareholder return - Ke) As we already saw that the shareholder return is equal to the shareholder value added divided by the equity market value, the created value can also be calculated as follows: Created shareholder value = Shareholder value added - (Equity market value x Ke) Table 1 shows in simplified form the relationship between three variables, which are sometimes confused: increase of equity market value, shareholder value added, and created shareholder value. Table 2 contains the Market value, the shareholder return, the shareholder value added and the created shareholder value of the S&P 500 for the years 1991-2010 Table 1 Increase of equity market value, shareholder value added, and created shareholder value ________________________________________________________________________________ Increase of equity market value = Equity market valuet- Equity market value t-1 Shareholder value added = Increase of equity market value - payments from shareholders + dividends + repurchases - conversions. Created shareholder value t = Shareholder value added t - (Equity market value t-1 x Ke) ________________________________________________________________________________ Table 2 S&P 500. Shareholder return, shareholder value added and created shareholder value ($ billion) $ billion 1991-2010 1991-1999 2000-2010 Shareholder return 8,7% 19,8% 0,4% Δ Market value 9.234 10.115 -881 Shareholder value added 9.908 9.448 460 RF (10 years) 5,3% 6,4% 4,4% Ke 9.6% 11.0% 8.4% Risk Premium 4.3% 4.7% 4.0% Shareholder value creation -4,515 5,116 -9,631 2 - IESE Business School-University of Navarra Table 3 Contains the details of Table 2 for every year Evolution of the S&P 500. 1926 – 2010. (January, 1926 = 100). Average annual return of the S&P 500: 7.8% Average annual return of the S&P 500 adjusted by inflation: 4.7% 100.000 S&P 500. Adjusted by inflation S&P 500 10.000 1.000 100 10 1/26 1/31 1/36 1/41 1/46 1/51 1/56 1/61 1/66 1/71 1/76 1/81 1/86 1/91 1/96 1/01 1/06 1/11 1/26 1/31 1/36 1/41 1/46 1/51 1/56 1/61 1/66 1/71 1/76 1/81 1/86 1/91 1/96 1/01 1/06 1/11 0% -10% -20% -30% -40% -50% -60% -70% S&P 500 / Historical maximum -80% -90% IESE Business School-University of Navarra - 3 Table 3 S&P 500. Market value, shareholder return, shareholder value added and created shareholder value ($ billion) $ billion 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 91-10 91-99 00-10 Shareholder return 20% 8% 10% 1% 38% 23% 33% 29% 21% -9% -12% -22% 29% 11% 5% 16% 5% -37% 26% 15% 8,7% 19,8% 0,4% Market value 2.824 3.015 3.306 3.346 4.588 5.626 7.555 9.942 12.310 11.735 10.467 8.107 10.285 11.289 11.258 12.729 12.867 7.851 9.927 11.429 Increase of Market value 629 191 291 41 1.242 1.037 1.929 2.388 2.368 -575 -1.269 -2.359 2.178 1.003 -31 1.471 138 -5.016 2.076 1.502 9.234 10.115 -881 Shareholder value added 446 215 304 44 1.257 1.054 1.877 2.159 2.092 -1.121 -1.395 -2.313 2.326 1.119 554 1.778 699 -4.760 2.078 1.495 9.908 9.448 460 RF (10 years) 8,1% 6,7% 6,7% 5,8% 7,8% 5,6% 6,4% 5,7% 4,6% 6,4% 5,1% 5,0% 3,8% 4,3% 4,2% 4,4% 4,7% 4,0% 2,3% 3,8% 5,3% 6,4% 4,4% Ke 13,9% 12,0% 11,7% 10,4% 12,8% 9,9% 11,0% 9,6% 8,1% 10,6% 9,1% 9,0% 7,8% 8,3% 8,0% 8,4% 8,9% 8,0% 6,3% 7,8% 9,6% 11,0% 8,4% Risk Premium 5,8% 5,3% 5,0% 4,6% 5,0% 4,3% 4,6% 3,9% 3,5% 4,2% 4,0% 4,0% 4,0% 4,0% 3,8% 4,0% 4,2% 4,0% 4,0% 4,0% 4,3% 4,7% 4,0% Shareholder value creation 190 -124 -48 -300 828 600 1.257 1.431 1.282 -2.430 -2.463 -3.259 1.694 269 -351 833 -435 -5.794 1.587 718 -4.515 5.116 -9.631 January 1990- December 1999 January 2000- December 2010 1.500 S&P 500 1.600 S&P 500 1.500 1.300 1.400 1.100 1.300 1.200 900 1.100 1.000 700 900 500 800 700 300 600 1/90 1/91 1/92 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 1/00 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 4 - IESE Business School-University of Navarra 2.