Seventy years ago, a lawyer in Chicago named Russ Gremel invested $1,000 (the economic equivalent of $13,000 in 2017 purchasing power) to buy shares in Illinois’ pharmaceutical giant The Walgreens Co. Over that time, he collected substantial dividend checks and watched that position balloon into over $2 million in value through 11% compounding from the capital gains exclusive of the dividends.
A few thoughts:
Gremel was able to turn $1,000 into $2,000,000 over seventy years without needing to reinvest the dividends. Had he reinvested into Walgreens stock, his compounding rate would have soured to 14% annualized. That would have turned his $1,000 investment into $14 million.
Am I suggesting that he shouldn’t have spent the dividends? Of course not. As Britain’s distinguished man of letters Samuel Johnson wrote in Rambler #58: “Wealth is nothing in itself, it is not useful but when it departs from us; its value is found only in that which it can purchase, which, if we suppose it put to its best use by those that possess it, seems not much to deserve the desire or envy of a wise man.”
There would be no value in just accumulating wealth for its own sake. By collecting the dividends, Gremel was able to use the Walgreens stock to both support his lifestyle and make a donation to a wildlife refuge.
Specifically, he was able to collect $1,000 in dividends in 1966, $2,000 in 1975, $4,000 in 1982, $8,000 in 1989, $16,000 in 1996, $32000 in 2003, $36000 in 2015.
That may seem low when compared to the final dollar amount that Gremel was able to donate but is not that unusual for a fast-growing company that is trying to rapidly open up new locations by reinvesting earnings into more corner stores rather than ship them off to shareholders. From 1970 through 2015, Walgreens had an average dividend payout ratio of 11.1%. Because he held it for so long, he was able to receive over $732,000 in cumulative dividends during his holding period even paying out cash dividends wasn’t really a party of Walgreens’ strategy.
When reading about Gremel’s investment success, the obvious follow-up question is: Does this have any instructive value? How can you make an analogous decision today that will be as useful to you over your lifetime as Walgreens’ stock was to Gremel?
In an interview discussing his rationale for purchasing Walgreens stock shortly after graduating from Northwestern’s law school, Gremel said that figured “people would always need medicine and women would always need makeup.”
This insight could be validated numerically by paying attention to Walgreens’ same-store sales. From 1970 through 2015, Walgreens saw same-store sales increases of 6% per year. It translated into about 7.5% earnings per share. This means that Walgreens shareholders were able to capitalize on a sort of double compounding—not only did their shares represent new locations that were cropping up across North America, but the existing locations were also adding single digit growth to profits. That combination, sustained year after year, is how you get 14% compounding for over half-a-century.
Qualitatively, an investor could have noticed Walgreens’ moat by paying attention to the fact that Walgreens management was insistent on placing all stores in high-profile locations at intersections and other prominent corner locations such that the immediate visibility would form a competitive advantage with spur-of-the-moment shoppers.
If you wanted to recreate Gremel’s success in your own life, you should pay attention to those “same store sales growth” figures because they often provide an insight into the sustainability of the business model. If a business is under-saturated in a given area, and the existing stores are showing mid-single digit same store sales growth or higher, you have probably found a good buy-and-hold investment candidate assuming the price you pay for the stock is rational. These days, there is a food/beverage company that is trouncing its competitors in terms of same-store sales growth that allows you to create Walgreens-type wealth if you keep your eyes open and pay attention.
Next, it is worth observing that these types of individuals have a deep stealth wealth streak. In Gremel’s case, he said: “I never let anybody know I had that kind of money.” This pattern shows up again and again with individuals that accumulate wealth and don’t purchase luxury goods.
In some cases, this probably comes from a a place of humility. Gremel mentioned that his family lost an extraordinary amount of money in the stock market crash of 1929. The story recounts: “We went from comparable wealth to abject poverty in 24 hours. We had no money. There were no food stamps. There was nothing except your friends and neighbors.” The humility angle is that Gremel could have predicted that another crash would wipe out his Walgreens investment, and would make no sense in treating it as a fountain of power if it could all be gone in an instant.
Or, it could be a self-protective device. As Gremel let on—it was friends and neighbors that provided assistance during the Great Depression. If the community learned of Gremel’s success with his Walgreens investment, then he may have feared that his friends would view him as the small-town piggybank.
There is the old Willie Sutton quote that suggests he responded “that’s where the money is” when being interrogated about why he robbed the bank. Well, if someone in Jefferson Park fell on hard times, who would they ask: They guy they suspect has $2 million, or some other acquaintance whose wealth status isn’t ascertainable?
More benignly, Gremel could have kept his mouth shut to avoid being a robbery victim. After all, if you’re an aspiring Jefferson Park criminal, the phrase “that’s where the money is” could apply to Gremel and banks alike. Though it sounds like Gremel’s wealth remained on his brokerage account and didn’t translate into anything portable, there is no reason for him to expect a potential burglar to know that or rationally process that.
I like Gremel’s story because there are instructive nuggets. Find businesses with a common-sense basis for longevity. Look to same-store sales growth for validation. Receive dividends and enjoy the fruits of some of your wealth today because you’ll never again be as young as you are today. But also, err on the side of humility because wealth can tempt people into unvirtuous behavior and the easiest way to avoid temptation is to resist the first inkling of its encroachment.