When facing the challenge of improving total shareholder return (TSR), most executives default to growth. But as much as investors value growth, they want to see that companies can manage capital efficiently.
Different paths to TSR
To get a deeper understanding of the relationship among growth, capital investment and TSR, EY professionals recently analyzed value creation for companies in the S&P 500 using a proprietary forecasted cash flow model.
Our findings challenge conventional wisdom, revealing sharply different paths to positive TSR depending on a company’s return on invested capital (ROIC).
For the study, we divided the sample companies into high- and low-ROIC groups, based on average historical ROIC over a three-year period, 2021-2024, and then examined how each group fared with TSR. (The analysis included 360 companies from the S&P 500 but excluded the financial services sector, companies that entered or exited the S&P 500 during the observation period, and some companies in sectors still severely affected by COVID-19 disruption at the beginning of the period, such as cruise operators, airlines and casinos.)
Tortoise vs. hare, grasshopper vs. ant
The lessons of the analysis mirror the morals of two fables: “The Tortoise and the Hare” and “The Grasshopper and the Ant.”
For companies with low ROIC — tortoises and hares, racing toward a common goal — the priority should be on earning the right to grow by improving their ability to get the most value from their investments. Meanwhile, companies with high ROIC — grasshoppers and ants, each taking opposite strategies — should prioritize deploying new capital at attractive returns.
The survey results have profound lessons for companies in each quadrant of high or low ROIC or TSR.
