Companies which diversify their revenue streams offer greater returns to their shareholders than those who don’t. A new report from Stryber looked at the increase in stock price combined with dividend payouts of 738 listed companies in Europe between 2010-2023, and compared the performance of those with multiple revenue streams and those without.
Stryber, a leading corporate venture builder and strategic growth consultancy, analysed sales and total shareholder return data for its newly released report, “The Diversification Dividend”. The findings offered a stark warning: a lack of diversification can be disastrous for shareholder value.
While diversification always provides higher shareholder returns, its importance was underscored during and after COVID. In the preceding period of calm between 2010-2019, businesses that had consciously added revenue streams during this period delivered 16% superior annual median total shareholder returns. In the turbulent years of 2020-2023, that number shot up to 53%.
Interestingly, the research reveals that the ability of an organisation to diversify is more impactful than the absolute level of diversification. The firms that focused on their core business gradually experienced a 6% lower annual total shareholder return, which significantly dropped to -14.2% compared to the median annual total shareholder return over 2020-2023. In contrast, the businesses that continuously diversified achieved an impressive 32.8% advantage.
The findings are published in the latest report from Stryber, entitled “The Diversification Dividend” – which continues research first conducted in 2021, in its “The Power of Diversification” report.
Key findings:
Jan Sedlacek, Co-founder and Managing Partner at Stryber, said: “Our research demonstrates that diversification is not only a strategy for growth but also a hedge against market volatility. Companies that focus solely on their core business may see short-term efficiency gains, but they risk long-term value destruction. On the other hand, if they have the capability to add new revenue streams, whether through M&A or venture building, they are better positioned to weather economic uncertainty and deliver long-term value to shareholders”
A prime example of successful diversification is Ashtead Group, a British industrial equipment rental company. Initially focused solely on the construction industry, Ashtead Group strategically diversified into non-construction end markets to mitigate the cyclical risks of its original core business. This diversification included a significant push into the rental of commercial floor-cleaning equipment for venues such as airports, hotels, and warehouses, and a larger inventory of speciality businesses like heating, ventilation, and temporary power solutions, targeting growth in these less penetrated segments. As a result, non-construction markets now represent 60% of Ashtead Group’s revenue, with specialty rentals comprising 30% of revenues, a significant increase from 13% in 2008. This successful migration is reflected into the annualised total shareholder return of 24% in the 2020-2023 period.
To read the full study, please download it via the website.
Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to reduce exposure to any single asset or risk.
Shareholder returns refer to the total return on investment that shareholders receive from owning shares in a company, typically measured through stock price appreciation and dividends.
A revenue stream is a source of income for a business, which can come from various activities such as sales, services, or investments.
Total shareholder return is a measure of the performance of a company's stock, calculated by combining capital gains and dividends paid to shareholders over a specific period.
Active inertia refers to a company's tendency to continue with established practices and strategies, even when market conditions change, which can hinder adaptability and growth.
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