There are about thirty to sixty companies in existence that should not be sold under any circumstances, and most of them are currently on the list of Dividend Aristocrats and Dividend Champions. One of those companies with an especially legendary history is Abbott Laboratories, which has such a long history that Benjamin Graham himself used the company as an example of a buy-and-hold forever stock when he was teaching at Columbia University.
Abbott Labs even worked its way on to page 97 of The Intelligent Investor, with Graham saying that it is usually good to set predetermined prices for buying a stock—in this particular example, Graham was arguing that investors shouldn’t pay more than 14x profits, although he uses 15x profits and 20x profits at times in his later work. Abbott Labs is referred to as the example of a company so good that hard rules will cause you to miss the excellent opportunity—Graham wrote that Abbott Labs had a blue-chip reputation as an excellent pharmaceutical back in 1939, and had “excellent prospects for long-term growth” but also traded at 22x profits. By 1948, Abbott had grown its profits from $2.90 to $10.90 over the 1939-1948 period. The price went from 62 to 150 over that time, and plus investors got to reinvest about forty dividend payments on the way up from 62 to 150 (in case you’re wondering, the other stocks that Graham considered buy-and-hold forever in his 1940 classroom were Coca-Cola and General Electric).
Benjamin Graham wasn’t the only person who noticed the attractiveness of Abbott Labs back in the 1930s—a young secretary named Grace Groner was an employee of Abbott Labs, and decided to invest her life savings at the time into three shares of stock valued at $60 each. The reason she was able to buy 3 shares instead of a round lot like 100 shares is because she was a company, and back then, companies offered fixed prices of the company stock in which employees could buy a stake as a sort of predecessor to the 401(k) company matching that we know today in modern America.
Anyway, Ms. Groner made a very lucrative decision about those three shares of Abbott stock—she chose to reinvest the dividends automatically and refused to sell any of the Abbott Labs stock throughout her lifetime, providing us investors interested in academic case studies with an opportunity to see what happens when you buy and hold something throughout the entirety of your life. When Groner died in 2010, that $180 investment in Abbott Labs stock grew into over $7,000,000. Seventy-five years of above-average compounding tends to do stuff like that.
Now, a lot of times, the message in the stories of these stocks get lost—people think they have to exactly replicate Groner’s life otherwise there are no lessons to be learned. That’s not the case at all. You don’t have to be a cat lady meting out Iams by the spoonful in order for these stories to have relevance.
When I see stories of lives like Grace Groner, I think of the following things:
First, certain companies should not be sold because they become excessively overvalued, nor should they only be bought at a discount. The compounding engine is so great that the goal should be spending as much time owning them as possible, rather than trying to get the price right. For me, those are companies like Disney, Coca-Cola, Visa, Nestle, Unilever, Church & Dwight, Exxon, Chevron, Johnson & Johnson, Procter & Gamble, and yes, Abbott Labs.
Second, it’s important to try and figure out the right approach towards reinvestment. On one hand, the power of compounding gets significant turbocharged because of automatic dividend reinvestment. Spending 75 years pouring more and more organic cash into Abbott Labs is an important reason why common stock investing can be so lucrative. On the other hand, the purpose of investing isn’t mindless empire building, but rather, growth with a purpose—if Groner had spent her life using every dividend check to buy groceries, pay off her house, and then take vacations, she still would have had over $3 million in Abbott Labs stock at the time of her death.
And lastly, it is important to understand exactly why Abbott Labs performs so well. Although when we talk about Abbott historically we are also talking about the Hospira and Abbvie spinoffs, these general rules hold: the company operates across four ever-growing segments, which are nutritional, diagnostic, medical device, and established product. These are remarkably stable sources of profit, and Abbott only had nine years since 1939 in which profits didn’t grow on a year-over-year basis. This enabled Abbott to grow its dividend payout every year, and even the seemingly expensive valuations in the low 20x earnings range proved cheap given the consistent growth of the annual profits.
You see people sell McDonald’s when it has to rely on buybacks to fuel profit growth for a few years. You see Coca-Cola have a couple years where revenues remain largely stagnant. You see Philip Morris International have to take on significant debt to maintain its growth rate. People see these flaws, and treat them as reasons to sell otherwise excellent businesses with very stable profits. The importance of studying case histories like Abbott Labs is to recognize what happens when you stick with something exceptional—do you think anyone wanted to go through life selling Abbott Labs after one of those nine down years in profitability?
Originally posted 2015-04-22 19:12:04.