What are we looking for?
The U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as Dodd-Frank, was enacted in 2010 in response to the financial crisis. U.S. President Donald Trump is threatening to roll back some of the measures the landmark act mandates, but at the moment, the required disclosures shine a light on information that could be very valuable to investors.
During and after the crisis there was a great deal of (probably justified) public outcry over Wall Street executives being paid out egregious bonuses in the same year their banks had to be bailed out with immense sums of public money. Under Dodd-Frank, firms must now report the ratio of their chief executive’s total pay to that of the typical (median) employee. It is now public information that, for example, the CEOs of JPMorgan, Citigroup and S&P Global earn 364, 369, and 434 times their median employee, respectively. Warren Buffett, on the other hand, earns less than twice the typical Berkshire Hathaway employee.
With this kind of disparity in mind, we look for companies that could be poised to improve their executive compensation practices, and potentially tighten the income disparity to the benefit of shareholders.
The screen
We start with a universe of all public U.S. companies and screen for only those that 1) have executive compensation tied to long-term objectives; 2) allow shareholders to vote on executive compensation; 3) link CEO compensation to total shareholder return; and 4) have a compensation committee that is made up of at least 60-per-cent independent board members (that is, a majority of those voting on compensation do not have a conflict of interest). Of the approximately 13,000 public companies in the United States, less than 300 pass this test.
Next, we look for companies where this potential benefit to shareholders hasn’t already been realized or priced in. First we look for only companies whose total executive compensation has increased by at least 40 per cent over the past five years (if compensation has decreased, we are too late to capture any corresponding upside). Second, we require SmartEstimate forward (next-12-months) estimates of price-to-earnings, price-to-cash-flow and price-to-book ratios of no more than 20, 10 and 2.5, respectively.
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What did we find?
Express Scripts Holding Co., whose executive pay has risen the most over the past five years, at last may be ready to improve compensation practices, as it just named a new CEO for its subsidiary myMatrixx. Also worth noting: In March, Cigna agreed to buy Express Scripts for US$89.88 a share. As of Monday’s close, this is 29-per-cent above the current share price, which has been hit by anti-competition concerns regarding the deal.
A company that may be more familiar to Canadian investors, Molson Coors Brewing Co., is on the other side of the acquisition relationship with interest in buying part, or all, of financially distressed British-based Conviviality PLC. Molson Coors already uses Conviviality’s wholesale distribution business and shops, which operate under the Wine Rack and Bargain Booze brands.
Investors are encouraged to conduct their own research before investing in any of the companies shown here.
Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.
Hugh Smith, CFA, MBA