In a word? Chocolate.
Historically, there has been a cluster of three companies in top-performing sectors that build a disproportionate amount of wealth. If you turned your eye towards tobacco, you would make a lot of money over the years owning Altria, Philip Morris International, and Reynolds Tobacco. If healthcare was your thing, you would have done extraordinarily well over the years sitting on blocks of Becton Dickinson, Johnson & Johnson, and Abbott Laboratories stock. And in the beverage sector, the cluster of Coca-Cola, Pepsi, and Dr. Pepper held for decades would have created enough wealth to provide for your kids and grandkids. If high current income is on your mind, the energy sector is a friend with Exxon, Chevron, and Royal Dutch Shell.
I call this the easiest way to build wealth because it only requires three decision points: (1) look up the best-performing asset classes, and realize there has been something special about tobacco, healthcare, booze, energy, consumer staples, and even certain chemicals over the long term; (2) buy the most dominant, established companies in those industries with excellent long-term histories; (3) keep adding throughout your life, only pausing during periods when the stock is so overvalued it will meaningfully impair returns. The true appeal of the Coca-Cola or Johnson & Johnson is that once you own the stock, you continue to receive benefits from it in the form of cash every 90 days and capital appreciation over time without subsequent deliberate effort on your part.
There is another cluster of three companies that are worth adding to the list: the chocolate trifecta that consists of Hershey, Nestle, and Lindt & Sprungli. I’ve already written extensively about the first two, and most of you are aware of the excellent long-term traditions of the first two. Hershey has returned almost 15% per year since 1963, and Nestle has returned 13.5% annually since the end of World War II. The chocolate industry benefits from low capital requirements, steady demand in recessions and moderately growing demand in ordinary times, and the ability to earn a large per item profit even among the generics in the industry (and the well-branded chocolate earns even higher profit margins.)
Today, I want to focus on that third wheel that never gets covered–Lindt & Sprungli. The company doesn’t have a habit of splitting its stock, and it trades 74,230 CHF. That is the currency symbol for Swiss Francs, and a Swiss Franc is roughly equal to one dollar right now (in the past seven days, a Franc has been worth between $0.99 and $1.02.) So the price of the stock is analogous to $74,230. That alone deters people. It trades on the SIX Swiss Exchange in Zurich, which is not something that is readily accessible to people.
However, like Berkshire Hathaway, it does have some non-participating shares that don’t get to vote, but offer a more modest entry price and represent the same economic interest and proportional share of the dividends. The symbol for the stock that trades at 74,230 CHF is LISN, and the symbol LISP offers an alternative way to get your hands on Lindt ownership at 6,175 CHF. Again, that would set you back about $6,100 per share. And, depending on the type of account you hold the shares, you also have to deal with Swiss taxes.
Also, because Lindt does not trade on the American exchanges, it does not have to comply with GAAP accounting, so you have to be familiar with the intricacies of Swiss accounting to fully appraise the business.
This hassle–the high share price, Swiss exchange, Swiss taxes, and foreign accounting– contribute to make Lindt & Sprungli an undercovered gem that most investors do not put themselves through the task of studying and taking seriously as a candidate for investment.
The business performance is a metronome of consistency. All but two years since 1990 have delivered sales growth within the following range: 5.8% and 9.8%. People keep buying more and more Lindt chocolate. Culturally, they have made the wise decision of refusing to dilute the product–they use real milk chocolate from cocoa butter rather than diluting the brand by following the current trend to use vegetable oil instead. If you look at a Lindt bar, it will say milk chocolate (whereas competitors in the United States now have to label their products “made with chocolate” to adjust for this cheapening difference.)
By maintaining quality, Lindt has a rapid customer base that responds to increases in prices of Lindt or Ghirardelli without curtailing their chocolate purchases. That is why annual earnings per share have been between 9.2% and 14.0% in each of the past eight years.
Lindt has purchased Russell Stover, and this has increased sales by 17.4% compared to the previous base. The integration of Russell Stover into the Lindt & Sprungli umbrella is already off to a good start–Russell Stover averaged 6.8% sales growth in the years it was under American ownership. In the first year under Lindt, Russell Stover reported 9.8% sales growth and 12.4% earnings growth. This enabled the company to raise the dividend by 11.5%, which is actually below the twenty-year dividend growth rate of 12.3% annually.
There are some articles on the Motley Fool making fun of Lindt for trading at 9,000 CHF per share in 2003, remarking that the stock was overvalued and it would be unwise for long-term investors to load up on Lindt. Twelve years later, the price has increased to over 74,000 CHF. Someone that converted $121,000 into Swiss Francs back in 2003 and then purchased Lindt & Sprungli would have a million Francs–or a million dollars–in chocolate wealth today. The business is so exceptional that, if I were forced to pick fifteen stocks to own for the rest of my life, it would occupy a spot on the list.
The stock will always appear overvalued. Even during the worst of the financial crisis, the stock traded at 30x earnings. There is a reason for this. What kind of people do you think spend thousands of Francs to get their hands on a share of a stock? It’s probably going to be people with a long-term mindset. Just as Berkshire Hathaway shares trade at only 1/10 of the average on the New York Stock Exchange, shares of Lindt & Sprungli trade at only ⅙ of the typical rate on the Zurich exchange. There has been no study noting this, but I would speculate that the kind of people who buy Lindt & Sprungli are truly patient capital that are going to be in it for the long haul. As such, they won’t panic sell the stock during general economic recessions.
If someone buys a share today around 74,000 CHF, and then subsequently held for three decades, I would expect that the capital appreciation from the stock would be so substantial that you could buy a vacation home worth a million Francs and then use the dividend income from Lindt & Sprungli to fund a lengthy annual vacation.
The future growth is that substantial. It is only the equivalent of a $16 billion company. For reference, Nestle is a $250 billion company. Lindt is in that sweet spot where it has established blue-chip dominance yet it is still small enough that it has significant growth ahead of it (it doesn’t have saturation problems like Nestle or Coca-Cola where there are reasonable concerns about what will be the next market to conquer.)
For people getting started, I would focus on Hershey. Getting a chance to buy Hershey in the $80s is an opportunity worth taking advantage of–heck, it was just trading at $110 last year and it frequently goes through periods of overvaluation because it is of such high quality. If you can get a chance to buy a high single digit growing blue chip at a fair price six years into a bull market, take advantage of that opportunity. Once you got that built out, turn your attention towards Nestle and Lindt & Sprungli.
It remains true that you only need a couple ideas in your life to get rich. Buying and holding the Big Three beverage companies will get you there. Buying and holding the big three energy companies will get you there, with the downside being that you’ll see extreme volatility but the upside being that you’ll collect gobs of income along the way. Same with healthcare. What gets less attention is that you can do this with chocolate.
Everyone has heard of Hershey, Nestle, and Lindt & Sprungli. People see the products flying off the shelves everyday. Anyone can look up the exceptional dividend histories and capital appreciation for these three firms. You can make a lot of money during the rest of your life by realizing how lucrative the chocolate industry is, and then taking advantage of that insight by regularly adding cash to these three firms.
Originally posted 2015-11-26 11:28:38.