Welcome to the fifty-fifth edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens. Introduction Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies' financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform their industry sub-sector expectations. 1. Johnson & Johnson Johnson & Johnson (J&J) publishes an annual ‘Health & Humanity Report’, the progress and reporting section of their latest annual report notes the following achievements:
2. Allergan Plc Highlights from Allergan’s 2017 Sustainability Report include:
3. UCB SA UCB SA’s sustainability report 2017 highlights include:
Key Performance Statistics – Company Vs Industry Average Using Morningstar data, we can compare the performance of the three companies against industry averages: J&J’s lower than industry net margin and returns on assets and equity can be linked to the enactment of the Tax Cuts and Jobs Act (TCJA) in the US. This led to a sharp rise in provisions for taxes on income for J&J, the 2017 provision was $16.4b compared with a 2016 figure of $3.3b and is an initial estimate of what the impact of TCJA will have on the company’s net earnings. In addition to fiscal policy change in the US, J&J are faced with potential tax reform measures in Switzerland and the implementation of the OECD’s Base Erosion Profit Shifting (BEPS) project. The tax provision along with a net loss on disposal of assets ($2.5b) in 2015 help explain the negative 3-year net income growth figure. J&J’s operational performance was strong and outperformed their industry peers as did revenue growth. Gross profit (67% - 69%) and earnings before tax provisions (20 – 27%) relative sales have reasonably consistent since 2012. Allergan’s performance compared with its industry peers is extremely positive. Allergan has increased their gross margin from 78% in 2015 to 87% in 2017. Amortization of intangible assets, along with research & development costs and asset disposals/ impairments ($646m for Aczone) means that they have been running operating losses for the past three years. However, relative to their industry peers their operating margin (loss) is better. Revenue has grown at an impressive rate of 50% over the last three years. From a financial leverage point of view, their current debt/equity of 0.4 is at prudent levels. Allergan appears to be in restructure mode (sold generic business to Teva) as they generated large incomes from discontinued operations in 2016 ($15b) and 2015 ($3.9b). UCB had a strong financial performance in 2017. The company recorded €4.5b revenue and €1.4b of recurring EBITDA. €1.1b was invested in R&D or almost 80% of EBITDA. They outperformed their industry peers against all the key statistical measures in the diagram above and achieved their net/EBITDA target of 1.1 and recurring EBITDA/revenue goal of 30% in the past two years. From a segmental reporting point of view, their top product (Cimzia) accounted for 34% of total revenue with the vast majority of their remaining revenue spread across a further eight products. Geographically the US market accounted for almost half of their revenue with nine key European and Asian markets supplying most of the remaining income. In spite of more than half of their revenue being generated in non-euro currencies, UCB recording a small net fx loss (€44m) in 2017. Net debt/EBITDA have dropped significantly in the last five years as evidenced by a debt/equity ratio of 0.3. Summary When you compare the operational performance of these three pharmaceutical companies with their industry peers all three outperform their industries. This is a positive development as improvements to sustainable performance can be directly linked to operational performance such as the selections of suppliers, sourcing of energy, water usage, employee training, recycling etc. Overseeing the financial performance of a large pharmaceutical’s company involves the proactive management of a multitude of risks. Show leadership in the area of sustainability can help mitigate against but not limited to risks to: staff (health & safety), the environment (fines), reputation (bad publicity), operations (inefficiencies). It will not solve for other market risks such as changes in fiscal policy and foreign exchange fluctuations however it is a step in the right direction and will help strengthen the operational performance and stability of the business. Next week’s blog will feature three software companies, Dassault Systemes SE, Autodesk Inc, and Adobe Systems, and the measures they have taken to be more sustainable. Learn more If you liked this article you might enjoy reading the following information: Week 54 Insurance: Storebrand ASA, Sun Life Financial Inc.,and Allianz SE Week 53 Electricity & Gas: Enagas SA, Centrica Plc, and Iberdrola SA Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board ACCA: The Sustainable Development Goals: redefining context, risk and opportunity Disclaimer The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
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Life Insurance Document - Source - rawpixel and Free Images - Pixabay Welcome to the fifty-fourth edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens. Introduction Each week I will analyze three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies’ financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform their industry sub-sector expectations. 1. Storebrand Storebrand publishes various sustainability reports on its website ranging from their carbon footprint to their investing strategies. Key sustainability performance results include:
2. Sun Life Financial Inc. Highlights from Sun Life’s 2017 Sustainability Report include:
3. Allianz SE Allianz’s sustainability report 2017 highlights include:
Key Performance Statistics – Company Vs Industry Average Using Morningstar data, we can compare the performance of the three companies against industry averages: When you look at measures like Debt/Equity all three are in line with industry expectations. This isn’t really a surprise when you consider how regulated the Insurance industry with global regulations such as Solvency II that ensure Insurance have adequate levels of capital on their balance and are not over-leveraged.
Looking at Storebrand’s key financial figures for 2017 tells us that their solvency margin (172%), return on equity (11%), total assets (NKK569 Bn), equity (NKK 31 Bn), profit (NKK 2.9 Bn), earning per share (EPS) (5.28), and dividend per share (DPS) (2.10) are all stronger than their 2016, and 2015 comparators. Two of their three valuation metrics are more favourable than their industry peers according to latest Morningstar data. Revenue growth and net margin are slightly behind their industry, however, Storebrand publishes a list of companies it does not invest in. The Quarter 1 2018 list includes 191 companies, including 22 companies in the highly profitable tobacco industry. According to latest data published by Aswath Damodaran at NYU Stern, the average return on equity for the Tobacco industry is 89%, this compares with a total market average of 11%. Total Shareholder Return (TSR) is a simple measure that captures your total investment return (capital and dividend) from a share investment in a publicly listed company. TSR = (Current Price – Purchase Price +Dividends)/Purchase Price. E.g. If you bought one share in a company for $100, the share is now worth $110 and since you purchased the share you have received a $5 dividend your TSR is (110-100+5)/5 or 15%. Sun Life’s 2017 financial highlights include a 5-year TSR of 138% exceeding comparative TSRs for the S&P 500 (108%), TSX composite (94%), and TSX Financial Sector (51%). Sun Life’s current return on equity is a healthy 10.2 and their medium-term objective is to increase this to 12% - 14%. Morningstar only provides industry comparatives for valuations and Sun Life is broadly in line with industry performance for these metrics. Allianz SE’s 2017 return on equity (ROE) was 11.8%, its current ROE is 11.3% and above that of its industry average of 9.0%. Other financial highlights from the company’s 2017 annual results include revenue (5%) and operating profit (0.4%) growth. Both EPS (15.24) and diluted EPS (15.23) were more or less in line with 2016. Overall Allianz’s key statistics are favourable when compared with latest industry comparators published by Morningstar. Summary Insurance companies who are demonstrating leadership in the area of sustainability are choosing investment strategies that identify suitable companies to invest in and also ones that exclude unsuitable companies such as those in the Tobacco, Oil and Gas, and weapons industry. From a supply chain point of view, they actively manage their procurement practices through supplier risk assessments and select suppliers who share their sustainability goals. Within their own operations, they have reduced the use of paper by embracing advances in digital technology. Documents have been updated with plain language which helps make customers more aware of what they are signing up for when they buy one of their products. Next week’s blog will feature three pharmaceuticals companies, Johnson & Johnson Inc., Allergan Plc., and UCB SA, and the measures they have taken to be more sustainable. Learn more If you liked this article you might enjoy reading the following information: Week 53 Sustainability: Electricity & Gas, Enagas SA, Centrica Plc, and Iberdrola SA Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board Week 51 United Nations Sustainable Development Goals: Brief overview of the goals ACCA: The Sustainable Development Goals: redefining context, risk and opportunity World Benchmarking Alliance: Corporate Sustainability Performance Disclaimer The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Ohm’s Law Calculator - Source - Bluebudgie and Free Images - Pixabay Welcome to the fifty-third edition of my weekly blog. In volume II, I look at what some of the most sustainable companies in the world are doing to be better corporate citizens. Introduction Each week I will analyse three companies from an industry sector to see what policies and procedures they have implemented to make their companies more sustainable. I will also compare these companies’ financial ratios (valuation, growth, yield, leverage etc.) against their industry averages to see if a company can be sustainable and still outperform industry expectations. 1. Enagas SA Looking at Enagas’ ‘Our commitment to society’ report and its key sustainability figures the following sustainability data is revealed:
2. Centrica Plc Highlights from Centrica’s 2016 responsibility performance report include:
3. Iberdrola SA Iberdrola’s sustainability report 2017 tells us the following about their corporate structure and performance:
Key Performance Statistics – Company Vs Industry Average Using Morningstar data, we can compare key performance statistics of the three companies against industry averages: As you can see in the ‘Advantage by Statistic’ section of the table all three companies are outperforming industry averages with an aggregate score of 22 – 8.
Enagas’ Price/Sales TTM (trailing twelve month), Net Income growth and Debt/Equity levels are below industry averages for gas companies. Although average net income growth for the last three years is well below industry levels, Engas’ net income grew by 17.6% in 2017. Its operating and net margins are well above industry comparators. In 2017 Enagas reduced its net debt by €725m through improvements in working capital collections and less than expected capital expenditure. Enagas expects to be debt free by 2023, its current cost of net debt is 2.7%. Centrica is behind industry averages for price-to-book, operating and net margin and debt/ equity. This can be explained in the most part by the weaker performance of their energy supply businesses in the UK and US on the back of regulatory and political uncertainty, including plans in the UK to put a cap customer energy bills by the end of 2018. Centrica’s proposed full-year dividend of 12.0p per share is on par with 2016 in spite of weaker financial performance. The 2018 – 2020 outlook is for dividend levels to remain at current levels. The company also plans to continue with its cost reduction initiatives. Iberdrola’s operating margin of 8.7% is below the industry average of 17.2%, however, its net margin of 9% easily exceeds the industry figure of 5.6%. With the exception of operating margin, the other nine key statistics are ahead of the industry. What could help explain its favourable rating relative to its industry and in particular against all three valuation measures (price/ earnings, price-to-book, price/sales TTM) is the fact that capital expenditure exceeded cash from operations in 2017. An additional €32Bn will be invested in grid, renewables, and generation projects by the end of 2022. Summary The three companies have higher than average female representation on their board of directors. Interestingly Iberdrola who has the highest % of female board members performed best compared with industry averages followed by Enagas who had the 2nd highest. The three companies measure their health and safety performance against the highest standards and treat it as a high priority objective at all times. They invest in their people and assess their supplier’s sustainability performance. All of this is achieved without their financial performance suffering when compared with industry averages for their respective industries. Next week’s blog will feature insurance industry companies, and the measures they have taken to be more sustainable. Learn more If you liked this article you might enjoy reading the following information: Week 52 SASB: An A - Z of the Sustainability Accounting Standards Board Week 51 United Nations Sustainable Development Goals: Brief overview of the goals ACCA: The Sustainable Development Goals: redefining context, risk and opportunity World Benchmarking Alliance: Corporate Sustainability Performance Disclaimer The content of this article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find in this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise. |
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