In 1846, the Pennsylvania Railroad was created. It was one of the stodgiest blue-chip stocks in American history, even making dividend payments during the Civil War. In fact, from 1846 through 1946, it never cut its dividend and found itself boasting the longest streak in world history without a dividend cut. It was a symbol of American capitalism, as it operated 10,515 miles of rail line throughout Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania, West Virginia, and Washington DC.
I have quite a few articles that I intend to publish on the Heinz-Kraft merger engineered by Warren Buffett’s Berkshire Hathaway in partnership with the Brazilian cost-cutters from 3G Capital (Jorge Paulo Lemann, Marcel Telles, and Beto Sicupira), but I have been distracted from the pure investment analysis of the transaction because I have been thinking about the moral and philosophical implications of 3G’s business strategy after taking over the management a company.
Generally speaking, businesses with high-quality profits experience megatrends that can last in five to twenty year increments depending on the industry. First, there is the successful era when revenues are growing by 10% or more. This is when everyone gets excited about the business, and cost controls are ignored with a Sodom & Gomorrahic zeal. Helicopters and Falcon jets for the executives? Sure, no reason you can’t reward the leaders of the team for good work. Wait, is that cubed ice coming out of the fridge? That just won’t do. If you want your scotch to roll in style, the ice should be shaped like a bird, ideally discernible as a St. Louis Cardinal. Items that look like they could come from a Skymall catalog start showing up around the office. That is hyperbolic side of things, but does accurately describe some of the expenses at Anheuser Busch in the 1980s and 1990s while revenues were growing at a very healthy clip.
Michael Liedtke, the technology writer for the Associated Press, recently wrote an article discussing the effects of the unorthodox Google stock split designed to keep the majority voting control in the hands of founders Larry Page and Sergey Brin. The issue is that Google may have to pay out $500 million to shareholders of the non-voting stock because Page and Brin promised that the non-voting stock that its stock would trade within 1% of the voting stock. Because the non-voting shares lagged by almost 2% in the first year, Google may be on the hook for half a billion dollars in payments. All those criticism are fine and fair.
From 1900 through 2000, an investor that owned a tobacco index would have compounded wealth at 14.6% annually. Someone that invested in shipbuilders would have compounded wealth at 6.4%, over three full percentage points below the market at large over the course of the century. It’s a sector allocation that has profound consequences: A tobacco investor in 1900 would have turned $1,000 into $2 billion today. Someone that instead chose to hitch their fortunes to the shipbuilding industry would have turned $1,000 into $591,000 over the course of the past century. One investment approach would buy you the Dallas Cowboys and all of Jerry’s World included, the other would buy you an upper-middle class home after a century of patience.