Since 1977, Exxon has raised its dividend by 7.47% annually. This is a figure that can be a little bit misleading if you intuitively conclude that it tracks the earnings growth of the firm, as the Board of Directors decided in 1984 that a strategy dedicated equally to buybacks and dividends was in the best interest of shareholders. It’s served shareholders exceptionally well, as 6% annual growth from production expansion and commodity price increases has translated into over 9% earnings per share growth. Throw in the dividend, and Exxon shareholders have collected 13.12% annualized returns since 1977 (the results would be even better if dividend reinvestment were included, though they would be lower if held in a taxable account).
On page 4 of the annual report for Brunswick Corporation (BC), you will encounter the following passage: “Demand for a significant portion of Brunswick’s products is seasonal, and a number of Brunswick’s Dealers are relatively small and/or highly-leveraged. As a result, many Dealers require financial assistance to support their businesses, enabling them to provide stable channels for Brunswick’s products. In addition to the financing offered by BAC, the Company may also provide its Dealers with assistance, including incentive programs, loan guarantees and inventory repurchase commitments, under which the Company is obligated to repurchase inventory from a finance company in the event of a Dealer’s default. The Company believes that these arrangements are in its best interest; however, the financial support that the Company provides to its Dealers exposes the Company to credit and business risk.”
There are two main ways that you can get a fair (or better) price on a stock with a strong growth profile. You can either purchase a stock when the general economy is in a recession, or you can purchase an otherwise fast-growing company during good/ordinary economic times when it is presented with a solvable crisis that makes the stock temporarily cheap.
On August 5, 2014, I gave an example of the latter when I wrote “Target: Blue-Chip Value Investing in Action” in which I discussed how the temporary problem of the hacking scandal led to a slightly distressed stock price that provided a good deal for investors with a 5+ year time horizon. Since that date, Target has delivered 23.37% annual returns compared to 8.00% annual returns from the S&P 500.
When Charlie Munger was asked what it takes to be a great investor, his immediate comment was: “First of all, you must understand your own nature.” He elucidated: “Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable–and some losses are inevitable–you might be wise to utilize a very conservative pattern of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.” (This Munger quote comes from the March 13, 1998 edition of Outstanding Investor Digest.)
Absent a recession, it is almost always a given that a company growing at a fast rate will trade at a premium P/E valuation compared to the S&P 500 as a whole. One of the trickier aspects of investing is trying to figure out when you should pony up and pay the premium anyway (see Nike these past seventeen years) or recognize that the valuation has become so high that it will lead to subpar returns (see Coca-Cola these past seventeen years).
Mastercard is a company that has frequently caught my eye not just for its fast growth, but for the amount of money that can be extracted without threatening the competitive position of the business. The business is truly exceptional–it generates $9.7 billion in revenues and $3.7 billion ends up flowing to the bottom-line as profit. That is a profit-to-revenue ratio of 38%. One of the best businesses in the world at generating extractable cash, Coca-Cola, creates $8.8 billion in profits against $45 billion in annual sales for a profit-to-revenue ratio of 19.55%.