Even after 2022’s dismal stock returns (and bond returns, and commodity, and real estate, and cash…), the decade ended April 30, 2023 rewarded investors handsomely. The S&P 100 Index – the largest 100 companies by market capitalization – returned 10.2% per year, and closer to 12.3% when dividends are included. For reference, we would normally guide investors to expect returns closer to 8% for large company stocks.  

S&P 100 total returns were very widely distributed, ranging from 56% per year to -2%. Those two return bookends are reasonable given that the winner makes semiconductors for advanced graphics applications and the laggard produces household cleaning products – ‘growth’ and ‘not growth,’ one might say.  

However, what large company CEOs and directors did with their balance sheets within their respective industries emphasizes some additional differences worth understanding. The graph below compares S&P 100 stocks across five metrics: 1) annualized total returns, 2) average annualized revenue growth, 3) average annualized earnings per share (EPS) growth, 4) average annual stock repurchase expense as a percent of average revenue, and 5) the value of total debt issued as a percent of total stock repurchased. We segmented results into quartiles according to average annualized returns.  


Average returns for first and fourth quartile companies diverged hugely, and the pattern of returns maps very closely to the pattern of average revenue growth. Historically low interest rates during much of this time meant that discounted cash flow valuations for stocks became remarkably high. Low rates also meant companies across each quartile enjoyed cheap capital costs. 

First quartile companies also had the fastest EPS growth and as you would expect, fourth quartile companies the slowest. This is where the differences between quartiles start to get interesting: second quartile companies – the group with the second highest return rates – showed slight differences between sales growth rates and EPS growth rates even though they spent the highest percentage of revenue on stock repurchases.  

Another interesting difference is that while first, second, and third quartile companies issued similar amounts of debt relative to stock repurchases (33-34%), fourth quartile companies issued far more debt (effectively 50% of repurchases were financed with new debt).  

Putting everything together we can characterize stock returns, growth rates, and balance sheet management over the last 10 years in these ways: 

  • Fast revenue growth meant higher stock returns.  
  • Companies with fast revenue growth also likely experienced widening profit margins, leading to even higher EPS growth rates, but 
  • Companies whose revenue growth rates were beginning to slow (second quartile) relied more heavily on stock repurchases to generate EPS growth. 
  • Fourth quartile companies not only relied on stock repurchases, but they were also most aggressive in their issuance of debt to repurchase stock.  

As interesting (or not) as that might all be, where does that leave us now? 

To begin, if the Fed’s actions over the last 15 months have convinced us of anything it is that the ‘ZIRP’ (zero interest rate policy) era is over. This will mean persistently higher discount rates for stocks across all quartiles and likewise, opportunities to issue cheap equity and debt capital are gone. This also suggests that innovation holds a stronger hand than financial engineering – as it should. 

We believe that innovative companies with strong revenue growth will continue to reward investors with attractive stock returns in the decade ahead. Well-managed, slower growth companies can also provide portfolio benefits as core holdings. But companies whose products are experiencing slowing demand and who have sacrificed their balance sheets to fabricate profit growth through buybacks are in very weak positions over the years ahead. Buying back stock with a theoretical 8% cost of capital looked brilliant when the cost of debt was 2%, but far less so when the cost of debt approaches 7%. 


Past performance is no guarantee of future results.  Investing involves risk, including possible loss of principal.  Diversification may not protect against market risk or loss of principal.  The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities.  Actual investor results may vary. 

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