The approach was time-tested and hard to beat: Put your money in blue chips, decades-old companies that could be counted on to perform through thick and thin.
But now the market’s stalwarts are showing their age. Steady has become stagnant as companies once considered among the market’s most reliable post poor growth, quarter after woeful quarter.
The list of stumbling stars is remarkable: AT&T Inc., which on Wednesday lowered its revenue forecast; Coca-Cola Co. , which posted flat sales; International Business Machines Corp. , which threw out its profit forecast; Wal-Mart Stores Inc., whose same-store sales haven’t increased in the U.S. since 2012; General Electric Co. , whose stock price hasn’t topped $30 since the financial crisis.
A third of the companies in the Dow Jones Industrial Average have posted shrinking or flat revenue over the past 12 months, according to data from S&P Capital IQ. Revenue growth for nearly half the industrials didn’t outpace the U.S. inflation rate of 1.7%.
Each company has its own idiosyncratic problems—changing consumer tastes at Coke, for example, or technology-industry shifts at IBM—and each is taking steps to address them.
But underlying it all is a sense of malaise for companies whose once powerful formulas for success left them too big to switch tack quickly when market conditions changed.
“None of these are pathological companies,” says Anil Gupta, a professor of strategy and entrepreneurship at the University of Maryland. Instead, they had adopted what he calls “sticky” resources, not only technological systems, but employees and business processes that are geared to be successful in a particular range of circumstances.
“That’s what makes you successful. That also essentially locks you into the current paradigm,” Prof. Gupta says. “You become big, but you become trapped.”
The term “blue chips” was coined by Dow Jones reporter Oliver Gingold in the early 1920s and enshrined in the Dow Jones Industrial Average, which comprises 30 of the country’s leading companies.
But as many of its members hit tough times, the so-called leading industrials aren’t leading anymore. The industrial average is down 0.7% this year. Meanwhile, the broader S&P 500 index is up 4.3%.
Coke is the latest big company to rattle investors. Chief Executive Muhtar Kent had promised that 2014 would be a “year of execution” after the company fell short of its volume and revenue growth targets last year.
But when the soda maker unveiled its third-quarter results on Tuesday, it had failed in nearly every category. Coke fell short of its volume goal for the second time in three quarters and lowered its long-term revenue target. The company said that it expected to miss its year-end earnings goal and that next year wouldn’t be much better.
Coke’s shares fell 6% Tuesday, leaving them in the red for the year. The company’s stock fell slightly on Wednesday.
The company used to have a secret formula, and it wasn’t just how to make Coke. The company also knew how to sell it to bottlers—a lucrative strategy for decades.
U.S. soda-industry volume has fallen for 10 straight years as Americans have scaled back on sugary drinks. Zero-calorie Diet Coke and Coke Zero helped ease the downturn, for a while, but diet-soda sales have been falling twice as fast as full-calorie sales as consumers fret about artificial sweeteners. Sales in formerly fast-growing overseas markets including China, Brazil and Russia have slowed or reversed since last year. Soda consumption fell in Mexico after the government in January began taxing sugary beverages.
Mr. Kent blames the downturn mainly on weak consumer spending and economic volatility across much of the world. “I don’t see that improving overnight. It’s the new normal,” he said in a Tuesday conference call.
Coke is expanding cost cuts, restructuring its global supply chain and looking for new areas for growth. Bernstein analyst Ali Dibadj suggested on the call that Coke should focus on returning earnings to shareholders instead of pouring more money into a struggling business.
Mr. Kent said he remained confident that Coke has the brands and distribution necessary to return to faster growth.
Whether to invest in an aging enterprise or send money back to investors is one choice, but it is a tough one.
IBM has been buying its own shares for decades. It currently has fewer than one billion outstanding, compared with 2.3 billion in 1993. And yet the company’s stock fell sharply Monday after IBM reported its 10th straight quarter of flat or declining revenue and ditched its long-term profit forecast. That left the stock down 14% this year, making it the worst performer in the Dow industrials. The shares IBM repurchased for $11.2 billion early this year were valued at $10 billion at Wednesday’s close.
Big Blue’s current problem was a solution two decades ago. IBM moved into services and away from hardware, in a transformation that saved the company. But today, customers increasingly are choosing simpler services in which software and computing power is rented over the Internet. IBM is in that field, but the shift means less work for IBM’s legions of consultants and the company’s new cloud business isn’t large enough to compensate.
IBM continues to produce a lot of cash—nearly $11 billion from its operations in the first nine months of this year—providing the firepower to make another major transformation.
Significant growth is always a challenge for very large companies, which long have had to shift gears to contend with smaller, more-agile competitors. It gets harder still when the economy is sluggish.
“Large-cap companies are constantly reinventing themselves,” says Gina Martin Adams, a strategist at Wells Fargo Securities. “The trick today is that global growth is slower than it was in the last two decades, and the result is an intensely competitive environment that forces companies to be more nimble, highly efficient and more productive.”
Some big businesses avoid transformational moves, like a breakup. Splitting in two can shrink top executives’ paychecks, which depend heavily on comparisons to peer companies with similar revenue.
“This issue often divides the management from the shareholders,’’ says turnaround specialist Robert S. “Steve” Miller , who has helped steer companies including Waste Management Inc. and American International Group Inc. through trouble spots.“There’s a lot of resistance,” he says, speaking of companies generally.
Tech company Symantec Corp., where Mr. Miller is a board member, this month announced plans to split into a publicly traded company focused on data security and another targeting information management.
Symantec had been under pressure from activist investors to break up for five years, Mr. Miller says.
Such pressures are affecting many companies, even huge ones, as activist hedge funds have amassed more capital, drawn support from mutual funds and successfully taken on bigger and bigger targets.Companies have been spinning off or selling business units at near-record rates this year.
Activist investor William Ackman last year successfully pushed for a change at Procter & Gamble Co. , which replaced CEO Bob McDonald as investors complained of slow growth. Mr. McDonald was succeeded by A.G. Lafley , who emerged from retirement to retake the reins at the company he ran from 2000 to 2009.
Under Mr. Lafley, sales rose 1% in the fiscal year through June, or 3% excluding the impact of acquisitions, asset sales and currency-exchange rates. He responded by saying P&G would shift course and jettison dozens of brands to focus more sharply on those that account for most of its profit and sales.
Sydney Finkelstein, a strategy and leadership professor at Dartmouth College’s Tuck School of Business, says today’s blue chips face difficult challenges, such as globalization, rapid technological change and complex operations. Some have run out of new global locations in which to sell their consumer products. “They are too big to succeed right now,” Mr. Finkelstein says. “Size is an advantage until it becomes a disadvantage.”