Democracy has been very good for SA shareholders
The JSE crossed a milestone yesterday, with the All Share Index closing above 50 000 for the first time. It first closed above 5000 in April 1994, just before SA became a fully-fledged democracy. Over the same period, dividends per Index Share have grown from R117.89 in April 1994 to R1373.25 today, and that is at an average rate of 13.68% a year. Earnings per share have increased at a compound 13.18% a year rate, implying something of a modest and surely deserved rerating for the Index over the years.
The move from 5 000 to 50 000 is equivalent to an average annual compound return of 14.41%. Inflation averaged 6.32% a year over the period. Real JSE returns therefore have averaged over 8% over the period, a more than adequate reward for the risks shareholders have had to bear. The best month for the JSE since 1994, compared to a year before, was in April 2006, when the annual return was a positive 54%, while the worst decline in annual returns was realised in February 2009, when the ALSI Index had lost 43%.
That the Index has been able to increase about 10 times since then is no accident – it is the result of excellent performances by the managers of the companies that make up the JSE, not only in the form of higher levels of earnings and dividends delivered to shareholders, but also in much improved returns on the capital provided by share and debt holders.
The progress of South African companies in increasing their efficiency and value is depicted graphically in the chart below. Until 1994, the year that SA became a full democracy, the average South African company was earning a real return on the cash invested by companies- the return in the form of real cash out compared to real cash in (cash flow return on operating assets, or CFROI) at or below 6%, which is the global average for non-financial firms. Thus South African companies were generally destroying shareholder value before 1994, especially when considering how much higher the real cost of capital would have been in those highly uncertain times. But since 1994, the median CFROI has sloped upwards and remained well above 6%.
Today’s median listed South African company is reporting a very healthy CFROI of 10%. And as can also be seen in the figure, the performance of the top and bottom quintiles of SA companies has also sloped upwards, indicating more value creation for the best firms and less value destruction for the worst. At present, some 20% of South African companies are generating economic returns on capital above 15%, which is world-class profitability.
(It is worth noting that if a company generates a 10% inflation-adjusted return on capital, it generates enough cash to grow its assets at 10% in real terms.)
How does SA compare to other countries?
We show in the chart below the inflation-adjusted economic returns on capital of listed non-financial companies in a number of different countries during the past decade (Matthews, Bryant and David Holland, “Global Industry CFROI Performance Handbook, Credit Suisse HOLT”, February 2013). In what may come as a surprise to many, the figure reveals that South African companies have been generating the highest median economic returns in the world, better than Australia’s and those of the US and the UK. This is an accomplishment to take pride in, one that demonstrates that listed South African companies are well managed and competitive.
Most important to recognize and appreciate is that SA’s democracy gave SA companies the opportunity to engage globally in the years after 1994, in ways that politics made impossible before. JSE listed companies have been able to realise the economies of scale and specialisation that access to global markets in good services and capital makes possible. SA shareholders have every reason to be grateful for SA democracy, which helped produce such unexpectedly good returns on capital.