We are proud to own both Proctor and Gamble and Nestle.
Thursday, May 27, 2010
I've had a lot of people telling me lately that cash is king. I don't want to pop anyone's illusions, but for my money cash is certainly not king. Indeed, cash is dust because the rate of return for cash these days is almost zero. So in a world where everything seems like it is coming apart, where can you go with confidence? I think there are many safe places where one can achieve a reasonably good long-term rate of return. The key words here are safe and long-term. If you are trading the market on a day to day basis, you will never understand the power of the words "safe and long-term." Here's what you are missing. There is an old saying that goes something like this, "He who finishes first is often, he who can last." Easy money is simply one of those oxymorons that are kept alive by politicians and late night infomercials. Anytime someone starts talking easy money to me, I start heading for the door. Making money is hard, but if one invests in companies that can "last," it puts time on your side and not working against you. Among the qualities of companies that can last, are strong balance sheets, ample free cash flows, skilled and fair-minded management, and companies that, indeed, have stood the test of time. What I mean by "companies that have stood the test of time" might surprise you: I want to invest in companies that have not only prospered over time, but companies that at some point in their histories messed up and survived. Companies that have been tested in the fires learn something about reality. They come to a new and clearer understanding of what is valuable and what is not; what is doable and what is not; and what is within both their reach as well as their grasp. Genuine wisdom seldom comes from people (companies) who have never known suffering. Truth seldom springs from the lips and minds of people who only know the taste of sweet wine and have never tasted the teeth-jarring brew of wine turned to vinegar. I'm asked every day,"Where do I put my money?" As you might guess, I tell them put it where it is safe and where you are willing to leave it. If you put it where it is safe, time alone should make you money. Most people have no idea of how to identify a safe company. Therefore their only measure of the value of the company is the current selling price of its stock. If it's going up, it's valuable. If it's going down, it's trash. That is what I used to think before the crash of 1987. On that day stocks fell 23%. It was the first time in my career that I understood without a shadow of a doubt that price was not value. I saw crazy things happen that day, even more crazy than the actions of the markets lately. I realized on that day that I was clueless about true value. I was just like everybody else. I thought price and value were always pretty close. On that day I realized that price and value were not only not identical or fraternal twins, they were like pen pals in two different countries. It was in the days immediately after the Black Monday that I set out on a quest to try to find a way of determining the intrinsic value of a stock by means other than its current selling price. It is now 23 years later and I'm still learning, but, as you know, I am convinced the true value of a company has much to do with its current and future stream of dividends. Let me use two companies as examples of the epitiome of Rising Dividend companies: Procter and Gamble (PG) and Nestle (NSRGY). US based PG has paid a dividend since 1891. They have raised their dividend for 56 years in a row. They have a AA- rating by S&P. They have had positive free cash flow almost as far back as I can see. The long-time CEO Arther Laffley just retired and was replaced by company veteran Robert McDonald. PG has adapted to the changing tides of consumer tastes as well as any company in the world. However, the company has had several serious missteps over the years when the execution of their strategy or the strategy itself was flawed and the stock took a beating. A good time to have bought PG over the last 20 years was during these mess ups. Over the last 20 years, PG has hiked its dividend at an average annual rate of 11.3%. Its stock has achieved an average annual total return of near 12%. Switzerland based Nestle (NSRGY) is another company that has rightly judged consumer tastes for years. It is the world #1 food company, selling products in literally every corner of the world. Nestle is rated AA+ by S&P. It too has had an enviable free cash flow record for the last 20 years. Nestle has a more quixotic dividend policy than PG in that it does not hike dividends every year. However dividends have grown significantly over the last 20 years. Nestle has had its brushes with trouble on a few occasions over the years. Indeed, right now it is struggling with its lagging bottled-water business, of which they are the leader in the world. Changing consumer attitudes about the ecological qualities of the plastic in bottled waters has caused sales to plummet. Nestle is working hard to solve the problem, but a solution is not at hand. I have no doubts, however, that they will get it right and find another product that will contribute to their bottom line. Nestle, similar to PG, has hiked its dividend over the last 20 years by an average annual rate of 11.7%. During this time, its stock has risen at an average annual rate of 11.6%.