The Fortune 500 is to business what the Indianapolis 500 is to auto racing – it’s a big deal.
As usual, the data tells the story:
- According to the Fortune 500, the companies included on the 2019 list generate enough sales to account for 66% of the entire U.S. gross domestic product.
- Fortune 500 companies also accounted for $13.7 in sales in the same yearly timetable, a record haul, according to the Fortune 500 web site.
- The top of the Fortune 500 is a murderer’s row, from a business behemoth point of view. Just 10% of the Fortune 500 account for roughly half of that $13.7 trillion in revenues. Additionally, 27 of the 2019 Fortune 500 class earned over $10 billion in annual sales and six earned $1 trillion (which the Fortune 500 classifies as “rich as mighty nations.”)
In a cultural global climate where big corporations are routinely criticized as greedy and inhumane by politicians, media figures, and regulators (but not by the people who work for Fortune 500 companies or the people who invest in them), the Fortune 500 exists as a rare haven where company executives can thumb their noses at critics and wallow in their success.
How did the Fortune 500 itself feed the image of big corporate entities as success stories with monumentally profitable brands? It’s an interesting story, certainly worthy of telling.
So let’s tell it.
What Is the Fortune 500?
The Fortune 500 is the brainchild of Edgar P. Smith, an assistant editor at the publication (more on that in a moment.)
The index aims to rank the top 500 U.S. companies by a combo-platter of factors, including the most recent total annual revenues on a fiscal year basis. The Fortune 500 includes both public and private corporate titans, and no one who is tapped to appear on the list ever turns down the highly prestigious opportunity.
To qualify for the index, companies must meet the following criteria:
- The company must be incorporated in the U.S.
- The company must be operating in the U.S.
- Full transparency is key, as companies must file all necessary financial forms required by the U.S. government to qualify. For instance, a company that merged with another company so it wouldn’t have to comply with U.S. government-mandated document disclosure would not be eligible for the Fortune 500.
Companies that are eligible for the Fortune 500 should know that revenue calculations – the heart and soul of the index’s ranking system – are based on a company’s most recent fiscal year’s financial performance. As not all companies report at the same time, the calculations aren’t perfect, but the index does attempt to measure companies against each other as fairly and accurately as possible.
A Brief History of the Fortune 500
The Fortune 500 was created in 1955, by Smith. The first ranking included these household company names – especially in the 1950s.
- General Motors (GM)
- Jersey Standard (now known as ExxonMobil – (XOM)
- U.S. Steel (X)
- General Electric (GE)
- Esmark (Once the owner of Max Factor and Avis Rental, it’s now split off into several companies.)
- Chrysler (now Fiat Chrysler – (FCAU) )
- Armour (Now split into several companies)
- Gulf Oil (Ceased to exist in 1985)
- Mobile (Now part of ExxonMobil)
As the initial Fortune 500 list shows, early inclusions were dominated by several sectors – oil and gas and manufacturing, primarily. GM topped the first list with $9.8 billion in revenues. Compare that today with Walmart (WMT) , which topped the 2019 list with $514 billion in total revenues.
By the early 1990s, with the U.S. service sector flexing its muscles, the Fortune 500 shifted its calculus away from manufacturing and energy and toward the service industry with Walmart, AT&T (T) and Sears-Roebuck (SHLDQ) all cracking the top 10 list for 1994. Fortune 500 analysts rightly figured the U.S. economy was growing and branching out, and soon technology, telecommunications and health care companies began to appear on the list, as well.
Of the 10 companies that led the Fortune 500 in 1955, only General Motors (GM) remains on the top tier of the Fortune 500 today (at No. 13 on the 2019 list), now with $147 billion in revenues.
Here’s the current Fortune 500 top 10 list, as of 2019
- Apple (AAPL)
- Berkshire Hathaway undefined
- Amazon.com (AMZN)
- UnitedHealthGroup (UNH)
- McKesson (MCK)
- CVS Health (CVS)
- AmerisourceBergen (ABC)
Differences Between the Fortune 500 and Stock Market Indices
Main Street investors may understandably confuse the Fortune 500 index with high-profile stock market indices like the Standard & Poor’s 500 or the Dow Jones Industrial Index.
While highly successful U.S. companies will appear in all three indices (and the Fortune 500 is more of a ranking list than an index), there is an important distinction observers should know before using the Fortune 500 as a strict investment benchmark.
The Standard & Poor’s 500. This stock market index monitors the financial performance of the top 500 U.S. publicly-traded companies. It doesn’t include private companies (as does the Fortune 500) and banks on stock market performance, as measured by risks and returns, as a key metric in compiling the index.
The Dow Jones Industrial Average. Like the S&P 500, the DJIA tracks the performance of blue-chip companies strictly for stock investment purposes. It ranks the top 30 publicly-traded that trade on both the New York Stock Exchange and on the NASDAQ. Main Street investors can likely point to the DJIA when a financial reporter cites the overall stock market performance of the day – reporter’s base that call on the performance on key market indices like the DJIA and the S&P 500.
Unlike the main stock market indices (and there are many more indices than the DJIA and the S&P 500,) the Fortune 500 does build it list with an eye on stock market performance, with all the risk and opportunity metrics that the market indices use.
In other words, don’t depend on the Fortune 500 as a reliable stock market indicator when making investment portfolio decisions.
The Takeaway on the Fortune 500 List
In the last 64 years, the Fortune 500 list has, by itself, become a household name – just like the names that have graced the list over the years.
In one sense, the Fortune 500 has proven to be a very dynamic list, one that takes highly accurate snapshots at the highest level of the U.S. corporate ecosystem.
Overall, 1,800 U.S. companies have appeared on the Fortune 500 list since 1955, with some still standing, some morphing into other companies, and still many more gone to the big executive corner office in the sky.
One factor remains, however, and it’s a big one. Being named to the Fortune 500 is every bit a big deal in 2020 as it was in 1960. For the companies that want to make the list, the mission is clear – to be the king you have to beat the kings.
Mark that down as the Fortune 500’s mantra for the next six decades, just as it’s been for the past six decades.