Is Growth Dead? Finding Growth in a No-Growth Environment
Tweets screaming about growth. Headlines screaming about growth. Endless news flow screaming GROWTH IS DEAD! Yes, these lines breed fear, and fear sells news, but is the fear warranted? Is growth dead? Let’s step back and examine growth: what it is, what it means, and, ultimately how investors find it in a—OH NO—Low/No-Growth Environment.
What do we mean by “growth”? (We’ll concentrate on economic and financial metrics, leaving the personal side to those infinitely more capable in the “human” realm!) The first example could be growth in the number of a specific thing, say Bitcoin. Today there are 17.5 million Bitcoins in existence, and, at the current rate of creation, they will top out at 21 million in five-and-a-quarter years. That represents 3.7% compound annual growth in the number of Bitcoins in the universe. At that point, the growth rate will drop to zero, as the maximum number will have been reached. The total number of smartphones, automobiles, houses are common metrics that commentators get hung up on as signs of growth (or lack thereof) without any meaningful further examination. Is a Bitcoin a good investment simply because in 5 years there will be no more created? We have no idea and that’s not how we think about growth.
In the investment world, growth comes in many dimensions and flavors. A company’s revenue, or top-line, growth can come from increases in widgets sold, increases in the price of widgets sold (both organic growth), buying a competitor that also sells widgets (inorganic growth), or even taking market share from a competitor who sells inferior widgets. Earnings, or bottom-line, growth can come from selling the same number of widgets, but at the lower cost. Efficiency gains via automation or staff training may enable a company to lower the cost per widget, resulting in earnings growth. Even in seemingly stagnant environments, companies have multiple levers to pull to drive sales and/or earnings growth.
What a company does with its earnings is critical to understanding its investment merit. Dividend payments are a significant portion of total shareholder return and this bears out in virtually all global markets. As shown in the chart below, dividend payments represent anywhere from a 27% (South Korea) to 58% (France) share of total compound annual return to investors in various global markets for the 10-year period ending last December. Here, growth, as defined by compound annual return, is significantly enhanced by dividend payments.
Big market drivers matter. A lot. Here, we’re talking about big picture things like population growth, migration, aging demographics. These statistics get a lot of headlines without diving very deeply into the details. Europe has, at best, stagnant population growth. Bad, right? Not for a company like the French firm Orpea, which runs elderly care facilities in 14 countries with over 96,000 beds. Demographics are playing directly into their growth strategy by design. Japan’s population is in outright decline. Bad, right? Not for pharmaceuticals company Santen, which focuses on ophthalmology—a growing market in a country with an aging population. Growth can be found beneath the surface of damning headlines.
Last week, my colleague, Dr. JoAnne Feeney, wrote about the importance of stock selection. Here, we have dived in a little deeper to uncover growth where, at first glance, it appears to be lacking. Looking past the headlines and into the story behind stocks is critical to the stock selection process Dr. Feeney highlighted. We are finding growth stories around the world, so, no, MaryLou, growth is definitely NOT dead.
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