Brazil: Confronting the Productivity Challenge

Brazil: Confronting the Productivity Challenge

          
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Brazil: Confronting the Productivity Challenge

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    Past Value Creation: Fueled by Growth

    For shareholders of companies operating in Brazil, this virtuous economic cycle led to significant value creation, with growth as the key driver. To illustrate that, we analyzed the value creation of Brazil’s most liquid publicly traded companies for the period 2004 through 2011. This time frame spans the expansion phase following the crises that occurred early in the first decade of this century (the bursting of the Internet bubble and Brazil’s political transition) and the global turbulence that followed the global financial crisis in 2008.

    For these eight years, the average total shareholder return was 19 percent per year (calculated in local currency and not adjusted for inflation, which averaged 5.3 percent). This return is significant when compared with the average return for companies worldwide during the same period—4.8 percent according to the MSCI World Index.

    Our analysis of the six components of TSR (revenue growth, changes in profit margin, changes in valuation multiple, dividend yield, changes in the number of shares outstanding, and changes in leverage) revealed that the leading value driver was revenue growth, which accounted for approximately 80 percent of the value creation in the period.

    This held true for most of the top performers. For six of the ten companies that generated the highest TSR—ranging from 24.7 to 36.6 percent per year—revenue growth was the primary force behind value creation. (See Exhibit 3.)

    exhibit

    Our analysis of the top performers also showed the importance of dividend yield, which contributed 6 percentage points to this group’s returns and was the main driver for three of the top-performing companies.

    All sectors of Brazil’s economy had high average returns during the period 2004 through 2011. However, there was significant variation within sectors. For example, the average TSR in the industrial goods sector was 13 percent, but the TSR for individual industrial-goods companies ranged from –3 to 32 percent per year.

    Also, we found significant variation among sectors when we looked at the different phases of the eight-year period. (See Exhibit 4.) During the turbulence phase following the global credit crisis (from 2008 through 2011), Brazilian companies in the financial services and industrial goods sectors and those with high exposure to international markets faced value creation challenges.

    exhibit

    Thanks to the resilience of the domestic market, however, the TSR for Brazilian consumer-goods companies was 29 percent per year during this phase.