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Fortune 100: Everything You've Ever Wanted to Know About This Popular Annual Ranking

By Sean Williams - Jun 3, 2015 at 8:17PM

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What is the Fortune 100 list, why is it important, and what are its shortcomings? These are some of the questions we'll answer when examining one of the most followed annual rankings.

Source: Pictures of Money via Flickr

Though unique paths exist for all of us to reach our goal of a comfortable retirement, more often than not you'll discover that the foundation of most retirement portfolios consists of owning some combination of the largest companies in the world.

Why large companies? Because established and large businesses usually have the ability to generate consistent cash flow in any economic environment, they're often diversified, and most tend to pay a handsome dividend, which is sure to please any retiree or preretiree.

But understanding which large companies you should consider purchasing may not be easy, either, because there's a veritable mountain of them to choose from. Finviz lists 642 different stocks at market valuations of $10 billion or larger for investors to choose from to help solidify their portfolio.

So, how do you narrow down your investment options and make sense of the noise? One option is to consider taking a look at the Fortune 100.

What is the Fortune 100?
The Fortune 100 is a list composed by Fortune magazine every year of the top revenue generating companies within the United States -- both publicly listed companies as well as private ones. Note, while foreign companies are excluded from the list, a substantial number of U.S.-based business on the Fortune 100 list will have a presence in overseas markets.

Source: Wal-Mart

The most commonly referenced list is the Fortune 500, which as the name would imply ranks the top 500 public and private U.S. companies by gross revenue (which you can see here). The Fortune 100 is merely the upper echelon of Fortune's rankings and includes only the top 100 revenue generating companies.

Topping the Fortune 100 list in 2014 is the world's largest retailer, Wal-Mart (WMT 1.97%), which grew its annual sales fractionally last year to $485.7 billion. Rounding out the top five are integrated oil and gas giant ExxonMobil (XOM 0.98%) and Chevron, iconic conglomerate Berkshire Hathaway (BRK.A 2.10%)(BRK.B 2.12%), and the "fruit company" immortalized by Forrest Gump, Apple (AAPL 4.08%). Together, these five companies brought in roughly $1.5 trillion in revenue in 2014.

Why might the Fortune 100 list be helpful?
What's the point of a Fortune 100 list?

To begin with, the Fortune 100 list is a great collection of the United States' most stable companies. I know you're probably thinking that ExxonMobil's revenue is hardly all that stable with oil prices plunging over the past year, but even inclusive of the drop in commodity prices ExxonMobil's other business segments and remaining assets provide a buffer that protects its stock price from wild price swings. A majority of publicly traded Fortune 100 companies are going to give investors below average volatility due to their steady cash flow.

Warren Buffett. Source: Fortune Live Media via Flickr

This brings us to the next point: dividends. Because these U.S.-based companies are raking in the revenue hand-over-fist, they're also liable to pay out a substantial dividend. We know Warren Buffett and Berkshire Hathaway believe in reinvesting capital rather than paying out a dividend -- and with his track record who can blame him. However, companies with impressive revenue generation often turn these dollars into big returns for investors.

Apple, for instance, began paying its shareholders a quarterly dividend in 2012 at a split-adjusted $0.38 per quarter. Recently, it boosted that payout for the third straight year to $0.52 per share. All told, Apple will pay out approximately $12 billion in 2015 to shareholders via dividends.

Lastly, strong revenue figures would imply that consumers and other businesses prefer to do business with Fortune 100 companies, or perhaps that they possess a niche trait that other businesses don't. For example, Wal-Mart didn't just stumble upon its $485.7 billion in 2014 sales. People return to the company because of its discount pricing and its broad selection which smaller competitors have a difficult time competing against. Being included in the Fortune 100 could imply long-term success, which is something that would likely interest investors.

Shortcomings of the Fortune 100
But it's important to realize that the Fortune 100 isn't perfect.

Source: Flickr user Karlis Dambrans

Take the defining characteristic of the list as a prime example. Although revenue does help us weed out some of the biggest game-changers in an industry, it tells us nothing about the profits or margins of a business. Margins are an important aspect of measuring one company versus the next as they determine how much profit is ultimately left to be reinvested or divvied out to investors via dividends or share buybacks after costs are accounted for.

Not to rain on Wal-Mart's parade or anything, but its profit margin, even with its huge size advantage over its peers, is just 3.3% over the trailing 12-month period. After $485.7 billion in revenue, Wal-Mart produced a little more than $16 billion in profit last year and $28.5 billion in operating cash flow. By comparison Apple, which had $303 billion less in revenue in 2014, netted $39.5 billion in net income and nearly $60 billion in operating cash flow. The Fortune 100, however, won't cue investors into what could be major differences in margins.

The other shortcoming of the Fortune 100 list is that it fails to account for innovation. To some extent total sales are a representation of innovation. But for rapidly growing or niche companies innovation may not be properly represented in their Fortune 100 ranking.

Source: National Cancer Institute via Facebook

A perfect example here is healthcare conglomerate Johnson & Johnson (JNJ 0.91%) with its Fortune 100 ranking of 39th. Even though Johnson & Johnson only generated $74.3 billion in revenue last year, it's one of the leading pharmaceutical, medical device and diagnostic, and consumer healthcare product companies in the world. Not to mention, it also boasts a profit margin over the trailing 12-months of nearly 22%, implying its strong pricing power. The main driver for J&J is innovative: high-margin drugs being developed from its pharmaceutical segment. Unfortunately, the Fortune 100 doesn't include innovation in its rankings.

What the Fortune 100 is really best for
More than anything, the Fortune 100 is a great place to get your feet wet and familiarize yourself with some of the nation's largest companies. What you'll likely come to discover is that the rankings are somewhat fluid once you factor in innovation, margins, and other important metrics and long-term business model determinants. It's by no means a perfect predictor of stock market success, but utilizing the Fortune 100 as a starting point for your research certainly couldn't hurt.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$149.64 (4.08%) $5.86
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$128.48 (1.97%) $2.48
Johnson & Johnson Stock Quote
Johnson & Johnson
$181.09 (0.91%) $1.63
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$97.59 (0.98%) $0.95
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$478,669.51 (2.10%) $9,864.47
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$319.11 (2.12%) $6.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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