Outliers of the WSJ Management Top 250

In one of those meh everyone-gets-some-kind-of-award supplements the Wall Street Journal reported the Drucker Institute’s top 250 “best managed” companies.

There are five criteria: customer satisfaction, employee engagement, innovation, social responsibility, and financial strength. The categories are batting only 3-5 out of the gate. “Social responsibility” might be strike against management in some consideration, and Financial Strength can also be read different ways. If you have a good management team and good opportunity, shouldn’t you be levering up? Each of the 250 companies (of 752 reviewed large cap publicly traded firms) got star ratings on a 1-5 scale for each of the five categories: 1,250 total ratings. Grade inflation ran rampant: only 6% of them were a 1 or 2.

Usual tech suspects take the first seven positions. They’re willing to divest from Indiana if not Saudi Arabia which might help their responsibility score, and are throwing off oodles of patents and cash. Since they’re not restaurant chains of course they’re going to invest in their employees.

As one’s eyes’ roam down the printed page, I find it only interesting to pick out the outliers. Who are the unloved runts of the litter?

Of the 1,250 ratings there are only four one star ratings:

DXC Technology (DXC: $66) for Employee Engagement

Phillip Morris International (PM: $83) for Customer Satisfaction

Berkshire Hathaway (BRK-B: $220) for Social Responsibility

Comcast (CMCSA: $39) for Customer Satisfaction: no surprise there.

There are only 75 two star ratings (from my possibly erroneous hand count), highlights:

Amazon (AMZN: $1772) for Social Responsibility

General Electric (GE: $7) for Financial Strength (not 1? This maybe bankrupt once glorious stalwart is the eighteenth best managed company? $10 says their rating on this front was a four or five not very long ago.)

Wal-Mart (WMT: $99), and McDonalds (MCD: $186) for Employee Development. Wal-Mart and McDonalds have probably trained a fifth of America how to work in a corporate job. (I’m pulling that number out of my ### but it probably is enormous.) Wal-Mart openings in depressed areas can have a greater ratio of applicants to positions than Harvard. Training entry level workers to show up on time (and profit share!) is development of a different kind than Google’s and should be on a different scale.

Walt Disney (DIS: $116) for Customer Satisfaction. Wut?? Is there a chemical plant next to a population center also named Walt Disney? Are some people unhappy that ESPN is bundled in the cable plan? Talk to Comcast (see above).

Hewlett-Packard Enterprise (HPE: $15) gets two 2 star ratings (Employee Development, Financial Strength) yet still slides into a tie for 114th

The biggest laugher is Take Two (TTWO: $108) as a 2 star innovator. They’re redefining the cutting edge of open world gaming, providing the analogies for Elon Musk that’s its likely we’re living in a simulated world. This is the same rating given to fast food companies that haven’t changed how they or anyone else does business in many decades.

 

 

James Fallows’ China Airborne

China Airborne is a slight misnomer of a title — implying the usual indomitable success stories about China’s recent economic growth.  These are plentiful: gushing portrayals of new airports from Tom Friedman, warnings from Niall Ferguson or even Tom Siebel (part of this itunes lecture, admittedly given in darker US economic days of 2009.)

Fallows’ mixed work — it is repetitive at times and meanders too much around personal experiences in ways to my taste others such as Robert Kaplan do better — takes a different approach.  It wonders if Chinese economic progress may be capped by its controlled, state-centered approach.  Fallows is an avid pilot.  Is China capable of creating a high value industry such as the Airlines?  The question is treated at all levels: production of planes, placement of airports, training of pilots, control (now largely military) of Chinese airspace?

While he concludes that someone who answers authoritatively the question either knows much less or much more than him, the strong hints are he believes not.  The complexity of airplane development is one thread of the book, and sometimes comic state control from make work jobs to his own confrontations with police.

If you have four pages to read they are pages 92-96: “Apex Industries” and escaping the smiley curve.  The smiley curve represents a U shape of profit margins.  Brands and high value development are one, profitable edge of the “U” and high end retail and service are the other, where China is stuck at the bottom.   The compelling data is that trade deficits mask a lot of this phenomena – the entire iphone is represented as part of a Chinese trade deficit as a finished product but at best less than a tenth of the profit goes to China for example.

An Apex industry is drawn from biology’s “apex predator”: the lion on the savanna whose presence depends on layers of prey below them on the food chain.  If they’re there, the whole ecosystem is in good shape.  Aviation is obviously one of those apexes, biotech might be a natural other one.  Here the book tantalizingly ignores a more full investigation into the state of university systems (rampant cheating and poor if voluminous paper production in China has them nearly outside the global academic community.)  It also discusses the state firewall and gives anecdotes of the war against Google.  Had these been more fully explored the book might have made a greater impact than it did in publication this year.

The verdict on Boeing (BA $69) is unclear — though he provides a lens on the history of aviation one doesn’t find elsewhere, including early Chinese aviation pioneers in the Sun Yat-Sen era.  Several analysts discuss the enormous mistake Boeing has made in the outsourcing of much of the value chain — but this also hints at strong value to be found in General Electric (GE $23) engines; GE spends $2 billion annually on engine R&D he claims compared to $300 million in all of China.

Tale of Three Once and Future Dividend Providers, April 1996 to present

Investor return can come from appreciation, or dividends.  Microsoft (MSFT 31) announced this week the quarterly dividend will be raised to .23/quarter, going ex-dividend November 13.  It yields 3%.

I thought this would be interesting to compare to GE as classic growth stock, and Altria as a “high dividend payer” from the same approximate time.

If you’re even vaguely familiar with the market you’ll know MO & its descendants are going to come out ahead on total dividends, but what about total appreciation as well?

MSFT:

Microsoft paid a $3 special dividend in 2004, and has paid a dividend since 2003, starting at a humble .08 for the year.   In the fiscal 4th quarter of 2004, the dividend went quarterly at .08.   The dividend is unlikely to triple in the next eight years — for one thing the payout ratio has gone up.

It will have paid a total of $7.02 in dividends.  For those long term holders, this means if you bought in April 1996 congratulations you’ve just (before taxes) recouped your investment — of then a maturing company ten years after its IPO.   (This was a full two years after I made the worst investing decision of my life, selling the little America Online because Microsoft was coming to get it.)

Chart forMicrosoft Corporation (MSFT)

The classically safe large cap growth stock, GE, traded at 14.4 in April 1996 (now a humble 22, but probably a touch undervalued.)

GE has had their ups and downs of dividends, cutting it notably to .10/quarter in the financial crisis.  From the summer of 1996 you would have had $11.57 of dividends from GE (Genworth shares appear not to have been spun out to GE shareholders, but had some dividends they did.)

Chart forGeneral Electric Company (GE)

MO:

Phillip Morris a.k.a. Altria is the classic dividend stand out.  You would have made your $34.6 investment back in Altria dividends alone, $35.06 since the summer of 1996, but there is also Kraft and Phillip Morris International which were spun out in 2007 and 2008 respectively.

Each MO share got .692 of a share of KFT which has generated $6.51 of dividends, for $4.51/share.

Each MO share got 1 Phillip Morris International PMI share, which has delivered $11.35 of dividends.

$50.92 in total dividends of MO and its two major spin offs in the same time.

Chart forAltria Group Inc. (MO)

Chart  for Kraft Foods Inc. (KFT)

Chart forPhilip Morris International, Inc. (PM)

For total return calculation purposes you’re still ahead with Microsoft, but barely.

You’d have approximately $150 per share from that $34 investment, 440% price appreciation that is nearly identical to Microsoft’s, with higher dividend return!

I did hold MO, PM and KFT in a retirement account — to avoid the dividend taxation for a number of years, and reluctantly (and foolishly) sold to go into TBT instead.  Is the next MO…MO and its heirs?  Buy and hold is tough for me to stomach but when the right stock is found the results are spectacular.  MO was the classic poster boy for Jeremy Siegel’s The Future for Investors and it has held since the books’ publication.

Yield-hungry investors have piled into stocks like MO and PM and I think I will wait for a drop to get back in.

 

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