Warren Buffett gave the following example as a law of diminishing returns and future revenue growth, and I decided to take him up on it:
“A growth rate of that magnitude can only be maintained by a very small percentage of large businesses. Here’s a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980 and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years.”
I used the year 1990's Fortune 500 and the year 2013's Fortune 500 for my criteria. (Yes, I used 23 years instead of 20, but don't think much difference is made.)
Based on a capitalization rate of 15% and 23 years as a time interval, I arrived at a future value factor of 24.891 (1.15^23) and multiplied that by the 200th ranking company’s revenue in 1990, using it as a base for 2013 qualification.
2.172 x 24.891 = 54.063 Billion 2013 Annual Revenue as base for criteria.
I did not have much of a list so I decided to add in companies that had 23-year sales growth over 13% ($36.113 billion 2013 sales as the base).
Still only 86 companies in total made the cut.
I manually sorted through the list for companies that were both in the top 200 in 1990 as well as the top 86 in 2013. I found 28 that had over 13% revenue growth for the last 23 years or 14% of the 1990 Fortune 200.
How many of the 28 companies had over 15% annual EPS growth for the last 20 years? Buffett’s wager was that fewer than 10 had done so. I used net income as a proxy for EPS.
Lockheed Martin (LMT, Financial) had the largest CAGR of the bunch, making the earnings cut with $2 million 1990 earnings compared to $2.745 billion in 2013 or 36.29% CAGR over the last 23 years.
Coca-Cola(KO, Financial) also makes the cut from 1990 earnings of $71.7 million to $9.019 billion or a 23.39% CAGR for the last 23 years.
Intel (INTC, Financial) was another company with over 15% growth for the last 23 years, growing from $391 million net income in 1990 to $11 billion in 2013. Intel managed a 15.614% CAGR for the last 23 years.
ConocoPhillips (COP) went from 1990 net income of $219 million to $8.428 billion in 2013 or good for a 17.2% CAGR.
Apple (AAPL, Financial) was one of four in the 20%-plus club, growing from $454 million 1990 net income to a phenomenal $41.733 billion in 2013 or a 21.72% CAGR.
Berkshire Hathaway (BRK.A, Financial) (BRK.B) is really no surprise here considering the CEO and team who are running the place. Berkshire had 1990 net income of $447.5 million and 2013 net income of $14.824 billion or a 23-year CAGR of 16.44%.
Chevron (CVX, Financial) also had phenomenal growth numbers over the 23-year span, growing from $251 million to $26.179 billion or a whopping 22.39% CAGR.
Looks like Buffett’s bet would have paid off with only seven companies from the 1990 Fortune 500 growing both revenue at 13% or higher and net income at 15% or higher. It is crazy to think that if one took the Fortune 500 in 1990 (or possiblly now), with the goal of at least a 15% CAGR from investment, the chances of doing so would only be about 3.5%.
Score one for the small caps?
“A growth rate of that magnitude can only be maintained by a very small percentage of large businesses. Here’s a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980 and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years.”
I used the year 1990's Fortune 500 and the year 2013's Fortune 500 for my criteria. (Yes, I used 23 years instead of 20, but don't think much difference is made.)
Based on a capitalization rate of 15% and 23 years as a time interval, I arrived at a future value factor of 24.891 (1.15^23) and multiplied that by the 200th ranking company’s revenue in 1990, using it as a base for 2013 qualification.
2.172 x 24.891 = 54.063 Billion 2013 Annual Revenue as base for criteria.
I did not have much of a list so I decided to add in companies that had 23-year sales growth over 13% ($36.113 billion 2013 sales as the base).
Still only 86 companies in total made the cut.
I manually sorted through the list for companies that were both in the top 200 in 1990 as well as the top 86 in 2013. I found 28 that had over 13% revenue growth for the last 23 years or 14% of the 1990 Fortune 200.
| Company | 2013 Rank | 1990 Rank | |
| 1 | Exxon Mobile | 2 | 3 |
| 2 | Chevron | 3 | 11 |
| 3 | Phillips 66 (SpinOff) | 4 | 30 |
| 4 | Berkshire Hathaway | 5 | 179 |
| 5 | Apple | 6 | 96 |
| 6 | General Motors | 7 | 1 |
| 7 | General Electric | 8 | 5 |
| 8 | Ford | 10 | 2 |
| 9 | Hewlett-Packard | 15 | 33 |
| 10 | IBM | 20 | 4 |
| 11 | Archer Daniels Midland | 27 | 57 |
| 12 | Procter & Gamble | 28 | 14 |
| 13 | Caterpillar | 42 | 38 |
| 14 | Pepsi | 43 | 23 |
| 15 | ConocoPhillips | 45 | 30 |
| 16 | Johnston & Johnston | 41 | 47 |
| 17 | Pfizer | 48 | 80 |
| 18 | United Technologies | 50 | 17 |
| 19 | Dow Chemical | 52 | 20 |
| 20 | Intel | 54 | 137 |
| 21 | Coca-Cola | 57 | 121 |
| 22 | Merck | 58 | 70 |
| 23 | Lockheed Martin | 59 | 45 |
| 24 | Johnson Controls | 67 | 126 |
| 25 | Abbott Labortories | 70 | 90 |
| 26 | Dupont | 72 | 9 |
| 27 | Honeywell | 78 | 65 |
| 28 | Deere | 85 | 66 |
How many of the 28 companies had over 15% annual EPS growth for the last 20 years? Buffett’s wager was that fewer than 10 had done so. I used net income as a proxy for EPS.
Lockheed Martin (LMT, Financial) had the largest CAGR of the bunch, making the earnings cut with $2 million 1990 earnings compared to $2.745 billion in 2013 or 36.29% CAGR over the last 23 years.
Coca-Cola(KO, Financial) also makes the cut from 1990 earnings of $71.7 million to $9.019 billion or a 23.39% CAGR for the last 23 years.
Intel (INTC, Financial) was another company with over 15% growth for the last 23 years, growing from $391 million net income in 1990 to $11 billion in 2013. Intel managed a 15.614% CAGR for the last 23 years.
ConocoPhillips (COP) went from 1990 net income of $219 million to $8.428 billion in 2013 or good for a 17.2% CAGR.
Apple (AAPL, Financial) was one of four in the 20%-plus club, growing from $454 million 1990 net income to a phenomenal $41.733 billion in 2013 or a 21.72% CAGR.
Berkshire Hathaway (BRK.A, Financial) (BRK.B) is really no surprise here considering the CEO and team who are running the place. Berkshire had 1990 net income of $447.5 million and 2013 net income of $14.824 billion or a 23-year CAGR of 16.44%.
Chevron (CVX, Financial) also had phenomenal growth numbers over the 23-year span, growing from $251 million to $26.179 billion or a whopping 22.39% CAGR.
Looks like Buffett’s bet would have paid off with only seven companies from the 1990 Fortune 500 growing both revenue at 13% or higher and net income at 15% or higher. It is crazy to think that if one took the Fortune 500 in 1990 (or possiblly now), with the goal of at least a 15% CAGR from investment, the chances of doing so would only be about 3.5%.
Score one for the small caps?
