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industry to heavy government regulation and put a seri- ous drag on growth, as well as generally lowering investor expectations for industry performance. In the past five years, for instance, British American Tobacco’s sales have grown only 3 percent per year—half the average growth rate of our global consumer-goods sample. But the com- pany’s unusually high (and improving) EBITDA margins have allowed it both to increase its EBITDA multiple at a time when consumer-goods multiples were declining, on average, and to deliver more than double the dividend yield of the sample as a whole. The result: an average an- nual TSR of 23.4 percent, making British American To- bacco one of the top value creators in our global consum- er-goods sample over the past five years.

The hallmark of a sustainable cash machine is strong pricing power and high returns on capital. This allows a company to make huge cash payouts, while still having enough cash to fund some growth. And, as the British American Tobacco example suggests, when a cash ma- chine delivers even modest growth, the combination of that growth with high margins can have a major impact on a company’s TSR. (See Exhibit 2.) In this respect, per- haps the company on our list that most dramatically il- lustrates the power of a cash-machine route to sustain- able value creation is McDonald’s (22), where a focus on margins over growth has been the central component of

a dramatic TSR turnaround in the past decade. (See the sidebar “McDonald’s: Emphasizing Margins over Growth.”)

The cash-machine pathway to sustainability can be high- ly effective when a company has a previous history of relatively low returns on investment, a reputation for chasing market share, and a low valuation multiple. But even the most successful cash machine will eventually run out of room for further improvement. There are lim- its to how much any company can reduce costs or im- prove working capital efficiency. Even more serious, the higher a company’s dividend yield, the more investors will eventually be attracted to its stock, bidding its mul- tiple up and reducing the impact of its cash payouts on its overall TSR. In the near term, of course, a rising multiple boosts a company’s TSR. But it is a classic example of the principle “Be careful what you wish for,” because the higher its valuation multiple, the more difficult it be- comes for a cash machine to continue to exceed investor expectations.

Finally, in companies that pursue a cash-machine route to sustainability, sometimes an organization can become so focused on efficiency and target all its metrics to achieve it that managers become risk averse. They start passing on growth opportunities that they ought to be investing in.

Exhibit 2. It Is Possible to Deliver Sustainable TSR with Only Modest Sales Growth by Improving EBITDA Margins

Sales growth1 (%)

TSR2 (%)

British American Tobacco McDonald’s

5.5 6.6

19.0 7.0

S&P 500 average



EBITDA margin (%) 35





’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

British American Tobacco


Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1Ten-year average annual sales growth (1999–2008). 2Ten-year average annual TSR (1999–2008).


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