Opinion: Why High Quality, Trusted Companies Beat the S&P 500 by 30% to 50%

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Trust is one of the most valuable assets a business can cultivate. Within an organization, trust seeps into the culture. Outside of an organization, this translates into loyalty. Quality shareholders (QS) who value long-term trust among all stakeholders – employees, clients and shareholders – uphold this point of view in their investment practice.

the Trust across America (TAA) identified the most trustworthy U.S. public companies using objective and quantitative metrics including accounting prudence and financial stability, as well as a secondary screen of more subjective criteria such as employee reviews and reporting.

Companies considered to be trustworthy also tend to score well in the quality of shareholders rankings produced by the Quality Shareholders Initiative (QSI), which I manage, as well as the proprietary database of EQX, which I use to cross-check the QSI data.

TAA assessment on the S&P 500 SPX,
+ 0.03%
in 2020 identified 51 companies, 49 of which are also included in the QSI ranking. When comparing the two, more than a quarter of the top TAA companies are in the top decile of QSI; two-thirds are in the top quarter and all but two (92%) are in the top half.

Notably, the TAA top 10 and QSI top 25 have outperformed the S&P 500 by 30% and 50%, respectively, over the past five-year periods. Here is a sample of companies that score high in both trust and quality:

Texas Instruments TXN,
+ 0.70%
Most of its revenue is generated from the sale of computer chips and is one of the world’s largest semiconductor manufacturers. Founded by a group of electrical engineers in 1951, the company boasts a culture of intelligent innovation. Its activity is protected by four protective “moats” including: industrial and technological competence thanks to its employees; a wide portfolio of processing chips to meet a wide range of customer needs; the reach of its market channels through both, as well as its diversity and longevity.

For investors, this adds up to a winning recipe, especially when combined with Texas Instruments’ capital management strategy of maximizing long-term growth in free cash flow per share and allocating this capital in accordance with the QS playbook which favors judicious reinvestments, disciplined acquisitions, low-cost share buybacks and shareholder dividends. Some of the company’s notable QSs include: Alliance Bernstein, Bessemer Group, Capital World Investors, State Farm Mutual, and T. Rowe Price Group.

Another title on this list, Ecolab ECL,
-0.07%,
is a world leader in water treatment. Founded in 1923 as the Laboratory of Economics, its long-term outlook is reflected in the longevity of senior management: the company has only had seven CEOs in its nearly 100 years of existence.

These CEOs instilled a culture of customer service, a constant focus on helping customers solve their problems and achieve their goals. A learning organization, such a performance culture permeates the business from production to sale, as employees commit to the long-term goal of being indispensable to customers. Management rewards this employee conviction with long-term incentives and a high degree of autonomy. Ecolab’s QSs include: Cantillon Capital, Clearbridge Investments, Franklin Resources, and the Gates Foundation.

Finally, consider Ball Corporation BLL,
-0.29%,
the world’s largest manufacturer of recyclable containers. Founded in the late 1800s by two entrepreneurial brothers who foresaw the Mason jars patent to expire and built a glassblowing facility to make such jars.

Ball remains characterized by a culture of family, innovation and respect for natural resources. For example, Ball anticipated the ecological and business need to move away from PET and glass containers, both expensive to recycle and harmful to the environment, and towards environmentally friendly and cost-effective aluminum. The company embraces Economic Added Value (EVA) to ensure every dollar is well spent, long-term employee incentive compensation to reward long-term sustainable growth and a spirit of entrepreneurial freedom. QSs include: Chilton Investment Co.; T. Rowe Price; Wellington Management Group and Winslow Capital Management.

While some investors focus only on the bottom line and others only on signals of corporate virtue, QSs are holistic, given the inherent relationship between trust and long-term value. As nebulous as the notion of trust in corporate culture may seem, it is a value that is both profitable and ethical to explore.

Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality shareholder group, and editor, since 1997, of Warren Buffett’s Essays: Lessons for American Businesses. For updates on his research on quality shareholders, register here.

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