Shareholder value creators and shareholder value destroyers in USA. Year 2002 Pablo Fernández* and Laura Reinoso** IESE Business School ABSTRACT
2002 was a bad year: the shareholder value destruction of the companies in the S&P 500 was $3.3 trillion. In
2002 only 16% of the companies created value (80 companies created value and 420 companies destroyed value). The
percentage of value creators was 35%, 54%, 47% and 53% for 2001, 2000, 1999 and 1998. The market value of the 500
companies was $8.1 trillion in 2002 and $10.4 trillion in 2001.
The top shareholder value creators in 2002 were Boston Scientific ($6.5 billion), Bank of America ($6.4 billion),
Wachovia ($4.7 billion), and Procter ($3.3 billion). The top shareholder value destroyers in 2002 were General Electric
(-$185 billion), Intel (-$125 billion), Microsoft (-$119 billion) and AOL Time Warner (-$101 billion). We define
created shareholder value and provide the ranking of created shareholder value for the 500 companies.
We also calculate the created shareholder value of the 500 companies during the five-year period 1998-2002.
Wal-Mart Stores was the top shareholder value creator ad Coca Cola the top shareholder value destroyer during the
We also provide the shareholder return of the 500 companies. Only 148 companies (out of the 500) had positive
return on 2002, been the highest Providian Financial (82.8%). Dynegy had the lowest return (95.3%).
Keywords: shareholder value creation, created shareholder value, equity market value, shareholder value added,
shareholder return, required return to equity, EVA.
PricewaterhouseCoopers Professor of Corporate Finance
IESE Business School . Camino del Cerro del Aguila 3. 28023 Madrid, Spain
Telephone 34-91-357 08 09 e-mail: [email protected]
IESE Business School . Camino del Cerro del Aguila 3. 28023 Madrid, Spain
Telephone 34-91-357 08 09 e-mail: [email protected]
In this paper, we quantify shareholder value creation for the 500 companies included in the
S&P 500 in December 2002. We provide the created shareholder value for each and every company
for years 1998, 1999, 2000, 2001 and 2002.
In section 1 created shareholder value is defined and calculated for the S&P 500 as a whole.
Section 2 has the ranking of created shareholder value for the 500 companies in 2002 and in the 5-
year period 1998-2002. Section 2 has the ranking of created shareholder value for the 500
companies in 2002 and in the 5-year period 1998-2002. Section 3 has the ranking of shareholder
return for the 500 companies in 2002. Section 4 shows the relation between Shareholder Return and
Appendix 1 contains the Shareholder value creation in 1998, 1999, 2000, 2001 and 2002 for
the companies in the S$P 500 in December 2002. In Appendix 2 we claim that EVA does not
properly measure Shareholder Value Creation. 1. Definition of created shareholder value
We define shareholder value created following Fernandez (2002, 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
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:
+ Other payments to shareholders (discounts on par value, share buy-backs.)
The shareholder return is the shareholder value added in one year, divided by the equity
market value at the beginning of the year.
S hareholder 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
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
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)
Consequently, the value created is the shareholder value added above expectations, which
are reflected in the required return to equity.
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
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 1991-2002. Table 1. Increase of equity market value, shareholder value added, and created shareholder value
Equity market value - Equity market value
Increase of equity market value - payments from shareholders +
dividends + repurchases - conversions. Created shareholder value
Shareholder value added - (Equity market value x Ke)
Table 2. S&P 500. Market value, shareholder return. shareholder value added and created shareholder value ($ billion) 2. Shareholder value creators
Table 3 shows the top ten value creators and value destroyers in 2002, 2001, 2000 and 1999. Table 3. Top ten value creators and value destroyers in 2002, 2001, 2000, and 1999. (million dollars) Top shareholder value creators. Shareholder value created in $ million T o p s h a r e h o l d e r v a l u e d e s t r o y e r s . S h a r e h o l d e r v a l u e c r e a t e d i n $ m i l l i o n
The top shareholder value creators in 2002 were Boston Scientific ($6.5 billion), Bank of
America ($6.4 bn), Wachovia ($4.7 bn), and Procter ($3.3 bn). The top shareholder value destroyers
in 2002 were General Electric (-$185 billion), Intel (-$125 bn), Microsoft (-$119 bn) and AOL
Time Warner (-$101 bn). In 2001 Microsoft was the top shareholder value creator and Cisco was
the top shareholder value destroyer. In 2000 Altria (ex-Phillip Morris) was the top shareholder
value creator and Microsoft was the top shareholder value destroyer, but in 1999 the opposite
Appendix 1 has the ranking of created shareholder value in 2002, 2001, 2000, 1999 and
1998. In 2002 only 16% of the companies created value (80 companies created value and 420
companies destroyed value). That percentage of value creators was 35%, 54%, 47% and 53% for
Table 4 shows the created shareholder value of the companies in the S&P 500 during the
five-year period 1998-20021. Wall Mart was the top shareholder value creator ($86.5 billion) and
Coca Cola was the top shareholder value destroyer (-$125.8 billion).
1 Only 465 companies (out of the 500) traded as of December 21, 1997. Table 4. Created shareholder value (CSV) in the 5-year period 1998-2002 of the companies in the S&P 500 as of December 2003 (million dollars).
173 Freeport-Mcmoran Copper & Gold Cl.B
Table 4. (cont.). Created shareholder value (CSV) in the 5-year period 1998-2002 of the companies in the S&P 500 as of December 2003 (million dollars).
288 Starwood Htls.& Resorts Wwd.Paired Certs.Cl.B
3. Shareholder return
Table 5 shows the shareholder return in 2002 of the 500 companies. It can be seen that
Providian was the most profitable company, and that Dynegy (-95.3%) was the least profitable
company in 2002. 148 companies had positive return and 352 companies had negative return. Table 5. Shareholder return in 2003 of the 500 companies in the S&P 500
13 Freeport-Mcmoran Copper & Gold Cl.B
Table 5. Shareholder return of selected companies (average annual return) – CONT.
270 Starwood Htls.& Resorts Wwd.Paired Certs.Cl.B
Table 5. Shareholder return of selected companies (average annual return) – CONT. 4. Shareholder Return and size
Figure 1 shows the relation of shareholder return and size (measured as the log of the market
capitalization) in 2002. There is not a big relation. The slope of the regression is zero and the R-
squared is 0.1% (that is, the difference in size explained only 0.4% of the return). Figure 2 plots the
relation of the ranking of shareholder return and the ranking of size. Again, no relation is found.
Figure 3 shows the relation of shareholder return in the five-year period 2002 and size
(measured as the log of the market capitalization at the beginning of the period, in 1997). Again, no
significant relation is found. Difference in size explained only 0.4% of the return. Figure 1. Relation of shareholder return and size of the companies in the S&P 500 in 2002
Log (Market capitalization 2002 in $million)
Figure 2. Relation of shareholder return and size of the companies in the S&P 500 in 2002
Ranking (Market capitalization 2002 in $million)
Figure 3. Relation of shareholder return and size of the companies in the S&P 500 in the period 1998-2002
Log (Market capitalization 1997 in $million)
Appendix 1. Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 1 (cont.). Shareholder value creation for the companies in the S$P 500 in December 2002 Appendix 2. EVA does not properly measure Wealth Creation
We have compared EVA calculated by Stern Stewart and Co2 with created shareholder value. Figure 4 shows
EVA and created shareholder value for 269 companies in 1999. We only use data for 1999 because the mentioned
Fortune article only provides 1999 data. For a comparison of several years see Fernandez (2002), chapter 14.
The correlation of EVA with created shareholder value was only 17.66%. 60 companies had negative EVA
and positive created shareholder value. 64 companies had positive EVA and negative created shareholder value.
On average, the difference of shareholder value creation minus EVA was –434% of EVA. On average, the
absolute value of the difference of shareholder value creation minus EVA was 8972% of EVA.
With this evidence, we conclude that EVA does not properly measure shareholder value creation. Figure 4. EVA (according to Stern Stewart and Co) and created shareholder value for 269 companies in 1999 (million dollars) Created Shareholder Value 1999
2 See Fortune (December 18, 2000), “America’s Best and Worst Wealth Creators”, pp. 207-216. The article containsEVA (Economic Value Added), calculated by Stern Stewart and Co, of several American companies for 1999. REFERENCES
Fernandez, Pablo (2002), Valuation and Shareholder Value Creation, Academic Press. San Diego,
Fortune (December 18, 2000), “America’s Best and Worst Wealth Creators”, pp. 207-216.
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