New Study Shows ESOP Company Stock Prices Outperformed Market Indices

In the first study of its kind, The Stout ESOP Index, the global advisory firm Stout found that between 2021 and 2024, the average annual share price growth in an index of private ESOP companies substantially outperformed the S&P 500 index and the broader Russell 2000 index. The index was composed of just over 350 of Stout's clients that had an ESOP for more than one year during the time period. Stout weighted and rebalanced its index annually in the same manner that the S&P 500 and Russell 2000 are weighted.

Weighting means that the value of the shares for each company is multiplied by the number of shares. That number is summed across all companies and divided by the total number of shares. This methodology means companies with more total share value count more in the index.

The Russell 2000 index is more similar to the ESOP companies in the index because few ESOP companies would be large enough to be in the S&P 500. The S&P 500 also can be heavily influenced by a small number of companies, as was the case in recent years with the so-called “Magnificent Seven” index companies that generated most of the growth in the index over the study period, with other companies in the index performing much less well overall.

Other research has shown that being ESOP-owned contributes to sales and employment growth, but this is the first study to compare share price growth in an index of private ESOP companies to the public markets. Stock price data for private ESOP companies is not publicly available. We hope other firms will replicate this study to provide a broader picture.

The table below compares Stout's ESOP index to the Russell 2000 and the S&P 500.

The ESOP companies with over $500 million of enterprise value constituted 11% of the sample, those between $100 and $500 million 39%, and those under $100 million 50%. There are no available data on how this compares to ESOP companies overall because the DOL Form 5500 looks only at participant size. But the Stout sample probably somewhat overrepresents large firms.

Stout also divided the index into government contractors, industrial firms, and business and professional services. Government contractors performed about the same as the market, with the other two groups substantially outperforming the market.

The ESOP index is also less volatile than the market index. The ESOP index has a standard deviation of 1.29%, while the S&P 500 has a standard deviation of 7.2% and the Russell 2000 5.2%.

One of the criticisms of ESOPs has been that they are too risky. One way to measure risk in investments is to look at volatility. By that measure, the ESOPs in this sample are, at least as a group, less volatile than the market indices as a group. Part of the explanation for this is that ESOP valuations are done in large part by calculating the present value of expected future free cash flow, which smooths out future variability. By contrast, the stock market is subject to being repriced every millisecond and can react dramatically to news about the economy or individual companies. Valuations are also only done annually for ESOPs, whereas publicly held stock is revalued on a constant basis, allowing for more possibilities for variability. It may also be, however, that ESOP companies are more stable because they have more of an incentive to focus on the long run, not quarter-to-quarter results.

The Stout sample represents about 6% of all ESOPs. The representativeness of this group of companies was not assessed in the report, although the firms are probably larger than the typical ESOP. Stout has said that the report will be updated annually.