The Fortune Behind the 500: Labor and Revenue
Since 1955, The Fortune 500 has put out a list of top-earning, high-value companies. With stock values reaching as high as hundreds of thousands of dollars, many people are intrigued - What makes the Fortune 500, so fortunate?
Some background information: The stock market dynamic is complex even for a college-educated individual to truly understand, however in simple terms, the dynamic is controlled by supply and demand. Every day millions of people trade on the market, causing prices to fluctuate. The price of a share increases when someone buys the stock at a higher price than the previous, the effect is parallel to the decrease of a share. The total value of a company can be measured (in simplest terms), by multiplying the number of shares outstanding by the price of each share. However, a plethora of things can cause people to decide to buy a stock at a higher or lower price, the market’s worth is determined by many socioeconomic factors. A company’s worth also depends on its total revenue; so if a company spends more money on labor costs, the stock will need to be more expensive in order for the company to make a significant profit.
Goldman Sachs states about their basket - "Our 50-stock, sector-neutral, low labor cost basket (GSTHLLAB) contains firms with the lowest labor costs as a share of sales. The metric is based on the number of employees at a given firm and each company’s median employee compensation disclosed in proxy filings. The median stock in the basket has labor costs that equal just 5% of revenues, offers similar sales and EPS growth as the S&P 500, and trades at a discount to the S&P 500 (14x vs. 18x). '' Additionally, a majority of Fortune 500 companies have labor costs equal to just 12% of total revenue, in comparison to 27% of the US economy as a whole. The median S&P stock is expected to increase by 8% in the coming year, still giving them leeway - because these companies are so large, they have more bargaining and pricing power, which further reduces the negative impact on their profit margins.