In the 1980s and 1990s, one of the reasons why it was enjoyable to be a long-term shareholder of Coca-Cola stock is that the soda giant was able to grow volumes while simultaneously raising the prices of its drinks. Since around 2005 or so, Coca-Cola has struggled more so to grow volumes at the same time the company decided to raise prices—the company has resorted to holding prices steady or instituting temporary price hikes coupled with reductions (e.g. raise $1.25 soda to $1.50 then back to $1.25 so the $1.25 seems cheaper and the eventual $1.50 seems less lofty because it’s an already reached high).
By the way, that entry paragraph should not seem like significant criticism of Coke—one of the reasons why I am selective about the companies I cover extensively on this site is that I take difficult business conditions into account when doing my write-ups. Considering that I write for people who want to own the same companies without selling for 10+, 20+, 30+ years, it would be foolish of me not to prepare for the downsides. That’s why I happen to like Coca-Cola so much: even as the beverage giant works through a rough period (by its own very high standards), shareholders still get rich. Profits per share from $1.09 in 2005 grew to $2.10 by the end of 2014, and the amount of cash each share paid out in dividends increased from $0.56 in 2005 to $1.22 by the end of 2014.
The pace of the wealth creation slowed, but remained intact, while working through this part of the soft drink business cycle. Coca-Cola’s valuation has drifted towards 20x earnings away from 25-35x earnings in reflection of this slower growth, and someone dissatisfied with Coca-Cola’s recent performance would commit the cardinal sin of investing by selling low-ish, and the subsequent frustration would become significant when business conditions improve and he looks back and muses about what might have been if he had just held tight. I can’t think of many bad case scenarios that are more tolerable than collecting a rising dividend that has a tradition dating back to 1963.
That said, Hershey is doing something notably better than Coca-Cola right now—raising prices and growing volumes. In the past twelve months, Hershey has raised prices 7% to 8%, and yet the tons of individually wrapped chocolates and other candies continue to grow. The volume of chocolate and other Hershey-owned products continues to grow at 4.5% each year, and that is especially impressive because it means customers are demonstrably willing to buy more chocolate even as the company raises its prices at doubled the rate of inflation. They’ve grown their revenues from $5.6 billion to $7.5 billion over the course of 2010 through 2014, and that is why the company is such a lucrative long-term investment: it can readily increase prices of its products, and chooses to do so, without any pushbacks in the form of volume losses.
As a matter of valuation, I still don’t think I could bring myself to buy any Hershey stock at this price. When interest rates rise, or some kind of global event happens, you will get a chance to buy Hershey at below 20x earnings. It happened in 2003. It happened in 2008. It happened in 2009. It happened in 2010. It happened in 2011. It happened briefly in 2000 and 2002. The truly patient investor will get his price.
Both Coca-Cola and Hershey pass the first crucial test for investment consideration: If I dutifully reinvest dividends year after year, will there be a profitable business left standing at the end of my reinvestment period? The point is to avoid a Wachovia or General Motors type of situation, where you risk your own hard-earned capital and reinvest for years and years to see the money evaporate into nearly nothing. Not only do you lose the money that you put at risk, but you lose all the dollars, quarters, dimes, nickels, and pennies that investment capital could have produced. If you auto-reinvest into Hershey or Coca-Cola, you have the extraordinary high likelihood there will be something there for you and your family at the finish line. That said, Hershey is doing something right now that Coca-Cola is not: raising prices and simultaneously growing volumes. Coca-Cola is holding most prices steady, and holding most volumes steady. It’s something to keep in mind if the price of Hershey comes down a bit and you’re choosing which one is worthy of a fresh investment at this particular point in time.
Originally posted 2015-02-16 10:20:07.
