Someone that attended my high school is currently the manager of a McDonald’s franchise in St. Louis. Among other things, he brought up the fact that his compensation and opportunities for advancement are tied to the speed at which orders are filled. There is a screen that appears for the McDonald’s workers to see after a customer places an order, and a McDonald’s worker presses a button to signal that the order is completed. This is how the company manages efficiency. The logic is that customers served within three minutes of placing their order will be happier and more likely to return than if the order takes six minutes.
With the price of oil coming down to the $40 to $50 range, some companies that have fuel charges as a major expense are reporting profits that are higher than usual. You are seeing that with Carnival Cruise Lines which are seeing profits grow from $1.39 in 2013 to an expected $2.40 in 2015. The price of the stock has increased from $31 in 2013 to $47 at the end of today’s close. You do not want to hitch your family’s fortune onto the back of companies like this.
The reason why I say that is because Carnival carries high debt, has an indistinguishable moat, normally operates with high fixed operating costs, and is highly susceptible to high oil and gas prices. There is no need to ever buy a company that lives and dies according to a reverse cyclical relationship with the energy sector (i.e. when the cost of oil goes down, Carnival’s profits go up and vice versa).
From 2004 through 2014, BHP Billiton grew its profits from $0.86 per share to $5.18 per share, and raised its dividend from $0.33 per share to $2.36 per share. Over that same ten-year time frame, Aflac grew its profits from $2.30 to $6.20. And Aflac grew its dividend from $0.38 per share to $1.50 per share over that same period of time. And from 2004-2014, John Deere grew its profits from $2.74 to $8.63 per share, raising the dividend from $0.53 to $2.40 over that same stretch of time. These are healthy businesses in the commodity, insurance, and manufacturing sectors that over time grow profits and raise dividends like any long-term owner would hope at the time that he makes an investment.
There are two sets of circumstances that can potentially lead to making a life-changing investment. The first type is the one that gets all of the attention: It involves a company gaining market share in an industry with a very large niche. An obvious example of this type of growth is Coca-Cola. People recognize that the soft drink industry is super huge (each of the seven billion people in the world are potential, realistic customers) and Coca-Cola has reached the point where 3.5% of all liquid consumed in the world can be traced to a beverage that is earning profits on behalf of Coca-Cola shareholders. Because the market is so large, and the profit margins are so great, shareholders in Coca-Cola have been able to turn $1 invested in 1970 into $190 today even though 96.5% of the liquid in the world is consumed through some other owner. When markets are that big, even a small slice of the pie results in riches.
Today, I saw the wire come through announcing that Campbell Soup will pay a $0.312 quarterly dividend. If someone were to buy shares of Campbell Soup today, he would get a yield of 2.75%. This is the kind of company that is useful if you want to inventory wealth and modestly improve your purchasing power over time, but it is much less useful if your goal is to build wealth. This may not be immediately obvious if you study Campbell Soup’s long-term history of delivering 10.5% dating back to 1985. It appears to be roughly equal to what you would get by investing through an S&P 500 Index Fund.