For this week’s issue, Fortune partnered with Diligent a global leader in modern governance providing SaaS solutions across governance, risk, compliance, audit, and ESG. Researchers at Diligent granted us exclusive access to their 2023 “activism vulnerability scorecard.”
The study sought to find out what’s motivating activist investors these days. To conduct the study, Diligent looked at U.S. companies that had been “subjected to public demands by a primary or partial focus activist” since September 2022. In total, Diligent researchers looked at 50 companies.
Who are activist investors? Sometimes the so-called activists are hedge funds, which buy stakes in publicly traded companies in order to force change. Ultimately, they want to drive the stock price higher.
The numbers to know
67%
- … of companies targeted by activist investors had above median “cash flow from operations” relative to all U.S. companies tracked by Diligent.
67%
- … of companies targeted by activist investors had above median Ebitda levels. And 67% had above median retained earnings levels.
26%
- … of companies targeted by activist investors had above median dividend yields.
37%
- … of companies targeted by activist investors had total shareholder returns over the past three years that were above the median U.S. company.
Big picture
Activist investors are looking for good bones. On one hand, most of the companies targeted by activists since September 2022 have above average cash flow levels and profits (Ebita). On the other hand, they’re posting below average shareholder returns. Good bones + lackluster Wall Street outlooks = opportunity.
“Investors have appeared to prioritize underperformance”
The chart above shows how the 30 companies targeted by activist investors since September 2022 compare with all U.S. companies tracked by Diligent.
For example, 26% of companies targeted by activist investors since September 2022 have above median dividend yields. Meanwhile, 74% have below median dividend yields.
So what does the data tell us? Here are some thoughts from Joshua Black, the editor-in-chief at Diligent’s Insightia. He worked on the study.
“Since the start of the current proxy season in September 2022, activist investors have appeared to prioritize underperformance over a longer period—between three and five years—than their traditional focus on one-year total shareholder return, according to this analysis of the most common activist vulnerability criteria from Insightia, a Diligent brand. In keeping with the market’s turn to profitability from growth, activists have also targeted companies with high capex and overheads (SGA costs) in a bid to encourage cost-reductions. Low returns on capital and low asset turnover also stood out as common vulnerabilities, indicating activists’ drive for efficiency. However, it is notable that activists continued to mostly target strong companies, as expressed in their gross margins,” Black says.
