I believe students of investing will be looking back in 2025 to think, “Wow, Wal-Mart was pretty cheap at $60 per share in 2015. It was a classic example of Peter Lynch’s ‘blue-chip with a solvable problem’ theory.” The earnings yield on the stock is 8%, and is almost 9% when you measure Wal-Mart using a constant currency metric. The dividend yield is 3.25%, and the dividend payment itself has increased every year for decades. Although this explains why it won’t take much for Wal-Mart to give shareholders satisfactory returns from this point forward, it is worth taking a moment to pause and examine how Wal-Mart got itself in this position in the first place.
If you owned a collection of ExxonMobil, Chevron, BP, Royal Dutch Shell, Total SA, and the legacies to ConocoPhillips and Phillips 66–which at times included things like DuPont–you would have earned compounded annual returns of 12.3% between 1956 and 2006. I find these fascinating not just because I am attracted to concepts that can beat the S&P 500 over a half-century with minimal work after making the initial investment, but because of the counterintuitive nature in which these returns have been achieved.
Using a stock’s price-to-earnings ratio can be a useful metric when the following four conditions exist: (1) interest rates remain in a narrow band; (2) the growth of the enterprise is consistent through the decades; (3) the quality of the balance sheet and general risk profile remain closely the same; and (4) the stock is non-cyclical. All of these character traits need to exist, otherwise the use of historical P/E ratios can be a red herring rather than a helpful investment aid.
Companies like AT&T or Realty Income deserve higher P/E ratios when interest rates are 2% compared to 8% as the purpose of the investment is usually a quasi-bond with a growth kick compared to something like Visa where the purpose is long-term future growth.
In a word? Chocolate.
Historically, there has been a cluster of three companies in top-performing sectors that build a disproportionate amount of wealth. If you turned your eye towards tobacco, you would make a lot of money over the years owning Altria, Philip Morris International, and Reynolds Tobacco. If healthcare was your thing, you would have done extraordinarily well over the years sitting on blocks of Becton Dickinson, Johnson & Johnson, and Abbott Laboratories stock. And in the beverage sector, the cluster of Coca-Cola, Pepsi, and Dr. Pepper held for decades would have created enough wealth to provide for your kids and grandkids. If high current income is on your mind, the energy sector is a friend with Exxon, Chevron, and Royal Dutch Shell.
It was not fun writing with the gloves of an autopsist when giving my opinion that shareholders of Plum Creek will be in for a disappointing future if they hold onto their stock after it is tucked into the tree-farming operations of Weyerhaeuser. With Thanksgiving fast approaching, I’ll share a more cheery forecast: I think the shareholders of Starwood Hotels will do quite well over the coming decades as part of their stock will soon be converted into a mega-hotelier with Marriott.
The specific terms of the deal: Each share of Starwood Hotels will turn into 0.92 shares of Marriott Class A stock and there will be $2 in cash received for each share. The combined company will have 1,000,000 rooms across almost six thousand hotels. This strikes me as a win-win deal for both. Marriott gets some high-quality franchises at a fair price–no small feat six years into an economic expansion–and Starwood gets to join forces with an unquestionably better operator.