An important lesson that has probably taken me too long to pick up is that corporations with leveraged balance sheets tend to have a management culture that will perpetuate those leveraged balance sheets even as conditions improve and profits increase.
The reason why I made the mistaken belief otherwise is because I try not to overweigh the natural ebbs and flows of the business cycle. Every day, there is information blasted at the investor.
If the price of coffee beans rises by 10%, what does that say about the future profit margins at Starbucks? If oil is up 15%, what does that say about Chevron? Doesn’t a $1.2 billion settlement impair the fair value of Wells Fargo? Each of these news items meet the definition of “material” but aren’t really determinative of whether those stocks will be great corporations to passively hold for the next decade.
My mistake has been … Read the rest of this article!
Between 1988 and 1998, the price of Coca-Cola advanced from $2 per share on a split-adjusted basis to $43 per share, turning a $10,000 KO investment into something around $200,000-$250,000, depending on whether dividends were reinvested and the taxation applied to the account. Between 1998 and 2018, the stock has remained essentially flat, changing only from $43 to $46 over the past twenty years. If you have been a shareholder, the sum of your returns for the past two decades is little more than the dividend you have received.
That is not an “insult” to Coca-Cola. The business performance itself has been perfectly acceptable, as earnings per share have grown at a rate of 6.8%. With the current 3.3% dividend yield, shareholders could have paced themselves for something like 10.1% annual returns over the past twenty years.
They did not get these returns, however, because Coca-Cola was priced too high … Read the rest of this article!