Given the amount of lay investors, pension funds, insurance/institutional funds, endowments, and charity-related funds that are invested into the stocks that we regard as the blue-chip members of the S&P 500, it would make sense that these companies be conservatively financed so that there is always cash on fund to fund an emergency. Coca-Cola has $19 billion in available. Johnson & Johnson has $19 billion in cash. Procter & Gamble has $11 billion in cash. This is what you would expect from the backbones of American business.
And yet I’m blown away that Clorox, which is a great American icon that whose core business lines are among the fifty best in the entire country, has found itself in the current position in which its cash position is only $100 million while it carries $2.4 billion in debt, all of which is due within the next five years.
As companies like Apple and Alphabet went from companies too small for an index fund to its top components, such that 6% of all S&P 500 index investing dollars go into these two companies alone, it has been an underappreciated benefit that these two companies have been immensely profitable, sitting on hundreds of billions of dollars in cash and earning tens of billions of dollars per year in cash profits, respectively. Even though the companies are “new” by historical standards regarding where they were twenty years ago, they have not introduced a systemic risk because the profits were there.
It appears that Uber and Lyft will have their initial public offering within the next year, based on filings, and there are introductory estimates that Uber’s valuation will be $120 billion.
You know what can be an incredible competitive advantage? Not engaging in a particular expenditure that your peers do. Given how cheap and incredibly easy it is to make your own coffee, I do not understand those who go to Starbucks before work every morning, especially when they hit the drive-thru so they cannot even claim the ambience and lodging of going inside. For those who camp out at Starbucks with a book or laptop for three hours, I can at least understand it, as you’re really using the beverage as a proxy for $1.67 per hour rent for usage of a facility to tend to your business.
The part of passive investing that has long intrigued is that only a slight behavioral modification can result in outsized rewards. Picture a couple, each of which picks up a Starbucks coffee on the way to work each morning, for a daily … Read the rest of this article!
When you invest in a business, it can be overlooked that you need to draw a distinction between the per share results of a business and the results of the business itself. It is not enough to say that, say, Apple grew it profits by 10% to figure out what is going on with your wealth, because you do not own the entire business and the capital structure of any business is subject to stock repurchases (which can raise per share profits at a rate higher than the overall growth of the firm) or the issuance of new shares that results in stock dilution (which can cause your share to represent lower profits than the overall growth of the firm).
It’s always there in the background of every business I study. How is that one, single share protected over time?
Recently, people are starting to re-awaken to the fact that Coca-Cola is a business that earns 28.2% net profit margins, controls 3.5% of the entire world’s liquid supply, has the most vast distribution network of any manufacturer in the entire world, and has probably the most valuable intellectual property ever invented on its Coca-Cola assortment of brands that have truly global recognition.
The stock, which had traded in the $40s per share more or less since 2012, is starting to show that smaller packaging with higher unit costs and a ruthless focus on automation (that is largely underreported in the financial media) is driving a return to 7-9% earnings per share growth. With a dividend yield still north of 3%, it is now positioned for 10% to 12% returns over a multi-decade period.