What is a reason why stock prices of a particular company falls down lower than historical norms would suggest? One reason is when there is a general feeling in the air that, Amazon, Alphabet, or any of the remaining wave of new-age tech companies has a change of disrupting the company’s industry and core profit engine.
But, by the same token, it also stands to reason that one of the best places to find an investment is an industry where the investor community believes that disruption is likely to occur but, in fact, will not cause the scope of disruption that is anticipated.
This is arguably one of the most important investing principles to every apply correctly as it can result in wealth far beyond what you would ever expect. From 1956 through 2003, the old Philip Morris (now Altria, Philip Morris International, Mondelez, and a portion of Kraft-Heinz) delivered annual returns of 19.8%. It was the best performing stock in the entire stock market. During this forty-seven year investing stretch, a mere $1,000 invested into the old Philip Morris would have grown into $10.1 million as of 2003, and carrying Dr. Siegel’s research forward to 2018, would have turned that same $1,000 investment into $80.5 million in total just from that single $1,000 outlay.
But you know what I find so interesting? The old Philip Morris International only grew its profits by 8% over that same time frame. With a dividend yield typically around 5%, the old Philip Morris investor should have only expected annual returns of 13%. While there is nothing wrong with 13% growth instead of 18% growth, that same $1,000 would have only grown into $585,000 (2003) and $2.3 million if the old Philip Morris delivered results that perfectly matched its earnings per share growth and dividend payouts. Those concerns are fine, but there is a big difference between a $585,000 endpoint at a $10.1 million endpoint, and a $2.3 million endpoint and an $80.5 million endpoint.
What gives? The extra ingredient is that the old Philip Morris International was undervalued for about a half-a-century. This meant that each dividend received bought more shares, and the shares bought in that first year would increase in value of their own (to reflect the market price) and would also throw off cash dividends of their own. This happened every year, more shares getting added and added, throwing off more and more income, and repeatedly every 90 days for an investing lifetime, to the point where tens of thousands of extra shares ended up existing simply because of the reinvestment price. If a low price point gives you an additional share, you then get every bit of growth and every dividend that the extra share throws off for the rest of your lifetime, provided that the company maintains solvency.
I take the principle to mean that it can be highly lucrative to find businesses with high single digit dividend growth, a high current dividend yield rate, and a currently low stock market valuation that may have a chance of persisting for some time due to competitive fears. The competitive fears result in a lower than justified stock price which results in the dividend reinvestment and stock repurchases becoming far more effective than is deservedly the case, with the end result being that the shareholder ends up with more final wealth than the ownership position in the very fine business would naturally dictate. I believe I have found one such stock that currently meets this criterion, and you can join me by subscribing on Patreon to access it. Thank you.
Originally posted 2018-12-30 16:55:59.