Studies show that family-controlled public companies tend to perform better than most because the owners are more committed to their businesses and they take on less debt. But that only works if the families have enough stake in the company.
Which is why I was surprised while reading Dethroning the King, a book written by Julie Macintosh chronicling the 2008 takeover over Anheuser-Busch by InBev. Amazingly, the Busch family held sway over Budweiser with very little skin in the game, owning less than 5% of the company.
But the book got me thinking, who are some of the best family-controlled public companies? Here’s a list of my top picks, using specific criteria:
- The family must have an economic interest of at least 20% of the company and more than 50% of the votes.
- Two or more family members must sit on the board.
- The company’s stock must have achieved a 10-year annualized return at least 25% higher than the S&P 500.
More Than Jack
Recently, I made the Louisville-based company my midcap pick in the booze biz.
Investors interested in the liquor business know that Brown-Forman’s (BF.B) biggest brand is Jack Daniel’s. However, this family-controlled business has grown into so much more with CEO Paul Varga doing a masterful job growing its business. And today, its operating margins are higher than most of its peers, including Diageo (DEO).
The only thing missing from its brand lineup is a nice rum to compete with the likes of Bacardi and Captain Morgan. (If you’re reading this down in Louisville, might I suggest buying Eldorado in Guyana. They make some of the best rum at a reasonable price.)
The Brown family currently has four members on the 11-person board. As a family, it owns 27.5% of the equity and 69.3% of the votes, so it’s very much in control. During the past 10 years, it has achieved an annualized total return of 15.1% — 706 basis points higher than the S&P 500. This is a stock I believe fits nicely in almost any portfolio.
My second selection comes from my own country. Thomson Reuters (TRI) is one of the world’s leading providers of information for businesses and professionals worldwide. Its chairman, David Thomson, is Canada’s wealthiest person, thanks in large part to the Thomsons’ 55% interest in the company, which generated $12.4 billion in 2012 revenues, and $1.7 billion in free cash flow. With a market cap of $29 billion, Thomson’s interest comes to $16 billion.
In terms of the board, the Thomson family has two members represented (David and his brother Peter) as well as two non-family members associated with Woodbridge Corporation, the family’s holding company. Although TRI stock has performed poorly during the past five years, it has achieved an annualized rate of return of 11.7% over the past decade — 563 basis points higher than the S&P 500.
Long-term, Thomson Reuters has proven it can get the job done.
A Pretty Face
Fabrizio Freda, Estee Lauder‘s (EL) wonderful CEO, says the following on the company’s investor relations webpage:
“We are a growth company. Our mission is to keep expanding by taking our brands into new geographies and the best retail opportunities and creating must-have products. … The consumer is always at the center of our thinking.”
Since 1946, this is a company that’s been making people feel good about the way they look.
Now a global company, it generates 58% of its revenue and 79% of its operating income outside the Western Hemisphere. Consistently growing, its stock has achieved an annualized total return of 15.6% — 750 basis points greater than the S&P 500, and 637 basis points higher than its household and personal products’ peers.
The Lauder family own approximately 39% of the equity and 83% of the votes. A total of four Lauder family members currently sit on its 15-person board, including William Lauder, who currently is executive chairman and formerly was CEO until 2009, when Freda took the helm.
The Finest of Everything
Forbes estimates Bernard Arnault and his family are worth a whopping $29 billion. Arnault took a $15 million investment in 1984 in Boussac, the parent company of Christian Dior, and parlayed that into a 46% equity stake (63% of votes) in LVMH (LVMUY), one of the world’s biggest producers of luxury brands.
The “LV” of course stands for Louis Vuitton and the “MH” is short for Moët Hennessey, a combination of Moët & Chandon champagne and Hennessy cognac. Add Belvedere vodka, Fendi, Christian Dior, TAG Heuer, Sephora and many other fine brands to the mix, and you have all you need to survive amongst the jet set.
Even though LVMH owns some great brands, investors only care about stock performance. Arnault has done supremely well, achieving an annualized return of 14.2% for LVMH — 610 basis points greater than the S&P 500. As far as the board goes, Bernard Arnault is the chairman and CEO, while his son and daughter also serve on the 17-person board.
LVMH is just one more example of a family-controlled business that’s able to balance family ties with good old-fashioned performance.
If you’re wondering why Walmart (WMT) is not on the list, that’s because it fails to qualify. Even though the Walton family control 50.4% of its stock, WMT achieved an annualized return of just 5.2% over the past decade — 283 basis points worse the S&P 500.
The stock has done better of late, but long-term performance is what investors want, and Walmart has failed miserably in that regard.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.