lin, Novo Nordisk is a world leader in diabetes care, a disease area experiencing rapid growth in both the devel- oped and the developing worlds. But unlike some of the growth engines on our list, Novo Nordisk had an unusu- ally balanced TSR profile during the ten-year period from 1999 through 2008. (See Exhibit 1.) In a decade when many large pharmaceutical companies were paying top dollar to make acquisitions their senior executives be- lieved would boost revenue growth, Novo Nordisk stayed focused on its core disease areas and grew its revenues largely organically at a steady clip of 10 percent per year. Unusual for a growth company, Novo Nordisk also re- turns a considerable portion of its cash to investors (an artifact of the company’s unusual capital structure in which a nonprofit foundation owns a controlling interest), accounting for roughly a quarter of its average annual TSR of 14.8 percent.
The Cash Machine
In some industries, it is possible to sustain above-average value creation with only modest revenue growth. Compa- nies that do so tend to have relatively stable businesses that generate a great deal of cash. Their route to sustain- able value creation is less through growing revenues than through some combination of continuously improving margins, increasing asset productivity, stopping unprofit-
able growth that is destroying value, and then returning much of the freed-up cash to shareholders in the form of dividends or share repurchases or to debt holders by pay- ing down debt. We call this approach the cash machine.
A cash machine’s potential to beat the market in the near term is typically not as great as that of a growth engine. But even if a company beats the market average by only one or two percentage points per year, doing so consis- tently over a decade or more can add up to top-quartile performance.
There is one important precondition, however, for the cash-machine strategy to be successful. A company has to have a relatively low valuation multiple. A low multiple means that each dollar of cash paid out to investors has a higher yield. The higher the yield from these cash pay- outs to TSR, the less a company has to beat its already low growth expectations to deliver above-average TSR— and the more investors will be attracted to the stock and exert a steady upward pressure on the company’s valua- tion multiple, creating even more value.
For a pure version of a cash-machine pathway to sustain- ability, consider the number three company on our list: British American Tobacco. The well-documented health effects of cigarette smoking have subjected the tobacco
Exhibit 1. Novo Nordisk Has Taken a Balanced Approach to Value Creation
Novo Nordisk’s TSR decomposition profile, 1999–2008
Fundamental value (%)
Valuation multiple (%)
Free cash flow (%)
Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: The bars show the contribution of each factor in percentage points of ten-year average annual TSR.
EBITDA multiple change
Pharmaceuticals and medical technology ten-year sample average