Growth matters more than ever

Growth is magic. It makes it easier to fund new investments, attract great talent, and acquire assets. But the environment for growth has been difficult since 2008, and while there are signs that the Great Recession is at last receding, significant challenges remain. Real-GDP growth in the United States remains below historical averages; the economies of most European countries are still sluggish; and growth in emerging markets, particularly the BRICS countries—Brazil, Russia, India, China, and South Africa—is slowing down.

For more than a decade, we’ve been building and mining a global-growth database containing hundreds of the largest US and European companies. Recently, we’ve been revisiting some of the core analyses in the 2008 book, The Granularity of Growth,1to see if the challenging environment of recent years has shifted the picture of fundamentals we painted before the financial crisis. The answer is no, though the economic context arguably has increased the importance of an effective growth strategy.

Healthy growth boosts corporate survival rates, which was true in 2008 and remains true in the United States and in other developed markets. From 1983 to 2013, for instance, roughly 60 percent of the nonfinancial companies then in the S&P 500 were acquired—it’s grow or go, and they have gone. Consider these findings over that period:

  • Sixty of the 78 S&P 500 companies that generated top-line growth and improved or at least maintained their margins outperformed the S&P 500.
  • Companies with deteriorating margins performed less well, even if these companies were growing; just 8 out of 30 outperformed the index.
  • A higher percentage (56 percent) of companies that grew slowly, but also aggressively distributed cash to shareholders, outperformed the S&P 500.

As analysis of these companies’ total returns to shareholders (TRS) suggests (Exhibit 1), growth is only a means to the ultimate end: creating value. Not all growth opportunities are equal. Still, there’s no escaping the fact that growth is a critical driver of performance as measured by total returns to shareholders. And TRS underperformers are far more likely to be acquired.