In today’s Exponential Investor…
- One stock for a 50-year lockdown…
- The top three criteria for long-term investors
- What’s left if price is no object?
If you could only own one single stock for 50 years, what would it be?
You have to hold it through thick and thin, and cannot sell. If you die, your children have to hold it until the 50 years is up.
All you can do is collect dividends.
Which would you choose?
Let me know what, and why, at [email protected].
The first thing is to figure out what criteria we should use.
The first qualification should be that it must be a company resilient and brilliant enough to survive 50 years.
That’s not as common as you think.
A study by McKinsey found that the average lifespan of companies listed in the S&P 500 was 61 years in 1958. Today, it is less than 18 years.
They either get bought-out, merge, or go bankrupt like Enron and Lehman Brothers.
When trying to choose a company that will still be here in 50 years, where should you look?
Car companies, perhaps.
Fiat, Renault, Land Rover, Skoda, Ford and Mercedes are all well over 100 years old, among other companies. This is clearly a sector where companies can last a long time.
It’s very reasonable to think that people will still be driving cars in 50 years, though they might be hybrid or electric or even powered by hydrogen.
This leads to a tough decision though. Cars are changing, and for that reason the most popular car stock in the world right now is Tesla, which suits the idea of new kinds of cars coming through.
But tucked away on Tesla’s FAQ page is this beauty of a line:
Tesla has never declared dividends on our common stock. We intend on retaining all future earnings to finance future growth and therefore, do not anticipate paying any cash dividends in the foreseeable future.
Translation: only Elon gets returns on his investment.
If you are playing my game, Tesla cannot win, despite pioneering the next generation of products in a sector full of companies which last 50 years or more. It intends to return no cash (the irony of its inability to produce any aside), our only source of returns for the next 50 years.
So perhaps one of the companies that has proven adept at surviving the years. Volkswagen, maybe, or Ford.
Those are just some early thoughts though. To figure out the right company for this game, we need to break down the question, and figure out what criteria we should have.
Essentially, we need to look for the company whose dividend payouts will outweigh the current value of the shares we buy by the most.
The total earnings yield over the next 50 years.
So price is a factor, but over 50 years it’s not nearly as important as other things, like growth.
An earnings multiple that goes from 10 to 20 will only double your money in half a century, but if the earnings grow 10% a year for that time, your return will be 11x or 1,000% in the same period, without any multiple expansion. That’s the beauty of compounding…
That’s why long-term investors are far more focused on finding companies with characteristics that allow them to consistently exceed normal levels of growth, rather than looking for value. That’s why Warren Buffett pivoted from “buying good companies at great prices” to “buying great companies at good prices”.
A company that is growing consistently is also more likely to grow its dividends consistently, and over 50 years this will outweigh most differences in the price we pay today.
So we need to narrow down the stockmarket to companies which we are very confident will still be doing well in 50 years.
And then we need to do our best to estimate which will deliver the most money to shareholders over the period, with consistent earnings growth being a key factor. They need to be happy to return value to shareholders. Tobacco and Big Oil have been the pillars of dividend portfolios for decades. Do we bet on that changing, or can it continue for five more decades?
The energy sector is such an interesting one. Clean energy is clearly the future, but it’s harder to pick the winners and most don’t pay a dividend yet, so it’s risky if you can’t diversify.
Oil majors have the weight of history behind them, are famed for their shareholder returns and can be expected to play some kind of role in the decades to come. But… 50 years? Hard to be confident about that any more.
A separate game just for the energy sector would be very interesting, as we’re going to need lots of it in one form or another, for the next five decades and beyond.
But let’s leave energy to one side for now.
What other factors make other companies durable? Quality of product, a history of resilience, or a world-changing technology, perhaps?
History is one. If a company has survived a hundred years or more, it has survived the Great Crash of 1929, as well as inflation in the 1970s and the global financial crisis.
During the coronavirus panic/pandemic, such durability becomes especially relevant.
Historic brands like Ford or Mercedes have attracted people in every decade for the last 150 years.
Disney’s characters have enchanted children since the earliest days of cartoons and screens.
Banks have been lending for centuries, insurers have been calculating risks for almost as long.
People have been drinking Guinness since the mid-1700s, and wearing Tiffany jewellery since the mid 19th century.
And of course, It has to be Heinz has been true since the late 19th century.
Brands seem able to transcend generations, creating attachments from the video and food cupboards of our parents to the Netflix shows and takeaway habits of younger generations today.
Decades of history show that a company can weather more than just the current regime.
That is what has led Buffett to companies such as Coca-Cola, Kraft-Heinz and General Motors.
While in the UK, his many fund manager disciples have bid up companies like Unilever, Heineken, and Lindt.
And all involved have done brilliantly. By focusing on long histories, consistent dividend growth and above average return on capital invested, these companies continue to do well.
All these kinds of companies have done brilliantly, over the last two bull markets especially.
If you are investing for 50 years, perhaps their current elevated prices are okay. Some investors have tried to demonstrate that over a period of decades, high return on capital vastly outweighs high price-to-earnings ratios, with some success.
And it’s easier to sleep at night, owning Unilever rather than Nikola Motor, I imagine.
With such companies taking the role of bonds (passive, long duration, income-producing assets) in many pension funds and personal portfolios, they have enjoyed an especially good run.
So for our little game, such stocks could be a good place to start. I’ll be interested to hear what you all think.
Remember, send in your ideas and reasoning to [email protected].
All the best,
Editor, Southbank Investment Research