There is a popular saying in the stock market that elephants don’t gallop. I have no idea as to whether pachyderms can run a brisk pace. But I do know that heavyweight shares can, and often do, outrun smaller companies. Problem is, some things never change. And the stock market divide over small and larger companies is one of them. The best part of investing Small-cap investors will always insist that the best part of investing is unearthing the next Keppel Corporation (SGX: BN4) or the future Sembcorp Industries (SGX: U96), while they are still tiddlers. Big cap fans, on…
There is a popular saying in the stock market that elephants don’t gallop. I have no idea as to whether pachyderms can run a brisk pace. But I do know that heavyweight shares can, and often do, outrun smaller companies.
Problem is, some things never change. And the stock market divide over small and larger companies is one of them.
The best part of investing
Small-cap investors will always insist that the best part of investing is unearthing the next Keppel Corporation (SGX: BN4) or the future Sembcorp Industries (SGX: U96), while they are still tiddlers.
Big cap fans, on the other hand, insist that looking for potential stock market heavyweights while they are still featherweights can be a futile exercise. After all, stock market giants already exist, so why bother trying to reinvent the wheel.
A case in point is Apple. Why would anyone want to look for the next big thing in technology when something as big, as innovative and as powerful as Apple is already there for the taking?
What’s more, as the tech giant has shown, it is more than capable of breaking into one of the toughest markets in the world. Recently Apple announced that it had sold more iPhones in China than in its home US market.
Of course size isn’t everything. Big caps, or companies with sizeable market values, have some very unique qualities.
For a start, they are perceived to be less risky. They have been around the block several times over and they have been tested almost to the point of destruction and still live to tell the tale.
That said, big companies are not immune from risk – no business can ever be totally risk free. For example, companies such as Lehman Brothers and MCI WorldCom were once large businesses, before they spectacularly disappeared up their own shrinking balance sheets.
Crash and burn
Any company can crash and burn. Any company’s market value can go to zero. So size alone is unlikely to protect your investment from the recklessness of management and the perils of the economic cycle.
But large companies are generally less prone to fail. Their more reliable revenue streams, coupled with a better and broader customer base and access to dependable funding, could help to provide stability and make forecasting future earnings more predictable.
Most big caps also have commanding positions in their respective markets. In some cases they may even have near monopoly status, which means that they get to enjoy all the advantages of being the only rooster in the henhouse.
But there are downsides to being big. There always are. The price for greater dependability is often reflected in richer valuations. Consequently, investors will often have to pay more, if they want a piece of a Straits Times Index (SGX: ^STI) company. And many do, which is why blue chips tend to not only command a hefty premium but they can also stay expensive for a very long time.
Larger companies can also be guilty of being slow growing, which brings us full circle back to the myth that elephants don’t gallop. There can be some truth in that assertion.
One problem with big companies is simply that their products and services can be found just about everywhere.
Here, there and everywhere
For instance, Jardine Matheson (SGX: J36) is a global company whose products and services can be found in the four corners of the world. How, then, can a company such as Jardines possibly grow? Similarly, ComfortDelGro (SGX: C52) has probably expanded into every market that it already wants to be in. So, organic growth is about the best that it can hope for.
However, big companies don’t need to grow especially quickly to reward shareholders. They have something much more powerful in their lockers.
In general, larger companies do not need to retain as much of their profits to grow their business, which means that they can reward shareholders with more generous payouts through dividends and share buybacks.
Money in your pocket
Dividends are important. It is money in our pockets. What’s more the dividends together with any appreciation in the share price make up the total return that shareholders could enjoy.
The annual total returns for Jardine Matheson and Keppel Corporation, for example, have been 24% and 17%, respectively since the turn of the Millennium.
In other words, an investment in the Hong Kong “hong” would have doubled every three years, while an investment in the Singapore conglomerate would have doubled in around four, over the last 15 years.
Elephants like these, you see, don’t need to gallop. They just need to do the big things right.
A version of this article first appeared in the Independent on Sunday.
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