At the start of this year, I wrote an article entitled A Very Unique Period of Time - A Quick Case for Blue Chips. Here’s a reprint of that article (it’s only a few paragraphs):
“With so much going on in the macroeconomic environment, it’s easy to run from an intelligent investment approach and instead cower away from equities; the words of an investment guru should hopefully abate some of that fear and help individual investors confidently invest in some fantastic businesses selling at cheap prices...
In a recent interview, Consuelo Mack of Wealth Track spoke with Donald Yacktman, who runs the Yacktman Funds; for those searching for a successful investment strategy, look no further: in the past three, five, ten, and fifteen year periods, the fund has beat more than 99% of its’ peers. During the interview, Yacktman had this to say:
“I’ve been doing this for over forty years, and I can’t remember another period of time where I’ve seen so many high quality, profitable businesses selling at prices relative to the market this cheaply. To give you an illustration, the 30 year treasury today [January 5th, 2012] has a lower yield than many of these companies like Pepsi (PEP) or Johnson & Johnson (JNJ) or Procter & Gamble (PG). That’s a very unique period of time.”
At the close on Friday, the 30-year Treasury yielded 3.07%. This compares to 3.13% for PepsiCo, 3.27% for Procter & Gamble, and 3.48% for Johnson & Johnson; in addition, while the Treasury yield will stay stagnant for more than a quarter of a century, let’s look at how these companies have fared historically: since 1987, PEP, PG and JNJ have increased their dividend payouts (per share) more than tenfold.
As I noted above, it’s easy to step back from the markets while developed markets muddle along and deal with piles of debt; for long-term investors, now is the time to buy great businesses and to profit on the short-term blindness of the herd.”
Let’s start by looking at the results for those three companies (all of which I own, for full disclosure) since that article was written on Jan. 28 to approximate the one-year return:
|Stock||Price, 1/28||Price, 12/11||Return|
To be clear, those returns exclude dividends – and with all three companies yielding 3% or more (still more than the 30-year), that means each stock had a double digit return over that time period. As people who read my articles know, I don’t care about short term returns (I would rather have seen these stocks fall – I’ll be a net buyer for years to come, and would love to buy a claim on PEP’s future cash flows for as cheap as possible); however, I think the results from these companies are very instructive for the individual investor for a couple of reasons:
1. These companies are the cream of the crop – You don’t increase your dividend for half a century at a rate of 9.5% per annum by chance, as Procter & Gamble has done (JNJ and PEP have similarly impressive records); while it certainly will be much tougher to replicate that rate of growth through 2060, it’s quite astounding that one would choose their long-term bonds, with lower yields, rather than tag along with P&G as they look to replicate their success as the global leader in consumer packaged goods throughout the world over the coming decades (developing market sales have compounded at 12% per annum since 2000, reaching $32 billion in fiscal year 2012).
2. Even in terms of volatility, these companies are not “risky” – While I don’t agree with it, I understand why some people are scared of volatility and see declining prices as a reason to sell – the simple truth is that they don’t consider themselves to be long-term minority owners of the business in question (if they did, they would cheer on price declines, particularly at companies like the ones mentioned that spend billions year after year repurchasing common stock). With that said, if these people are still looking to dip their toes in the equity markets, you’d be hard pressed to find a less volatile place to put your money: As measured by Google Finance, these three companies are (on average) about half as volatile as the markets as a whole.
3. The valuations are reasonable, at worst (by my calculation) – This is the critical point: In terms of comparable investment yields (namely bonds), it’s astonishing to me that someone would pass on a basket (if they’re so inclined) of solid blue chips with an average earnings yield around 6% to 7% and instead settle for 10-year AAA corporate bonds yielding a paltry 2%.
The saying of the day is that stocks (usually referring to blue chips) are “the best house in a bad neighborhood.” For the individual investor who can only handle the slightest bit of risk and is either giddy or depressed at the latest macroeconomic developments, I think the choices are clear:
One, you can accept that you cannot handle volatility in the form of daily stock quotes, and settle for a decade of low single-digit bond returns AT BEST (you could also smash your computer so you don’t have to bother with those pesky ticker symbols day in and day out).
The other option (that still enables you to sleep at night) is to seriously consider the PepsiCo’s, Procter & Gamble’s and Johnson & Johnson’s of the world; mixed with some portfolio insurance in the form of Fairfax Financial (FRFHF), as well as some cash and bonds (if you must), there’s almost no question that this will prove much more fruitful over the coming years.
I think Don would agree – it continues to be a very unique period of time.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.