Sometimes the Best Long-Term Investments Are Hidden in Plain Sight
Building Wealth By Owning Durable, Stable, Sustainable Businesses
One of the fundamental rules of investing is KISS, also known as "Keep It Simple, Stupid". There are many ways to apply this lesson to your quest for financial independence. For most investors, it should come in the form of selecting low-cost index funds to serve as the foundation of a portfolio. It means avoiding things you don't understand. In the realm of acquiring ownership in individual businesses, it often includes avoiding a trap many investors find tempting: Namely, overlooking what one famed economist has called the "tried and true" companies that rarely change, are highly profitable, and pump out ever-increasing sums of free cash flow for the stockholders despite being so ordinary few give them a second glance.
This past week, my husband and I were traveling through Atlanta, Georgia, where we stopped by The World of Coke. The official archives of The Coca-Cola Company that includes exhibits such as the original stock certificates of forbearer Pemberton Chemical Company, an opportunity to sample 100 drinks from the beverage giant's portfolio of brands from around the world, a retail store, an advertising archive, a miniature bottling plant that allows you to see the process of turning the syrup into the finished product, an advertising theater with commercials from the past century in multiple languages around the world, and more.
As owners of the firm, it was exciting to see the history of the business that direct deposits dividends into our accounts four times a year. Walking through the rooms, I thought about that last point. Here it was, the very embodiment of the concept. Investors often overlook what is right in front of them, seeking diamonds on the horizon rather than the gold that is under their feet. Millions of people will walk through these same rooms, yet how many will stop and say, "I want to own this place"?
Precious few. The opportunity cost is tremendous.
It's never been a secret that Coke holds a special place in my family's heart and pocketbook. Our Christmas tree is adorned with red Coca-Cola memorabilia. In my office, I have a giant glass replica bottle on display. We bulk order Mexican Cokes from Costco. Throughout her childhood, we gifted my youngest sister shares of the common stock using the DRIP. My parents and in-laws hold it in their retirement accounts. My brother has his own stash, throwing off dividends to help grow his net worth while he's in medical school.
It is such a uniquely incredible business with mouthwatering returns on capital, high barriers to entry, and unrivaled geographic diversification, that there is a singular rule in place in our household: Once acquired, shares of Coke are not sold except under extraordinary circumstances. They are held as a future inheritance for our children and grandchildren, who will be able to enjoy the dividends but never sell the ownership itself. Like the folks of Quincy, Florida, we think of them as family money in the same way we would a cherished farm or grandma's wedding ring.
As long as the core economic engine is intact, we want our names on the stock certificates so we enjoy a bit of the profit generated by every bottle of Coke sold.
One of the appeals of Coca-Cola as an investment is that it's not just the classic red nectar of the gods that everyone associates with the corporation. The firm has 17 brands that generate more than $1 billion in per annum revenue, and another 20 brands that generate more than $500 million in sales each year. Including tap water, it brings in cash from roughly 3.5% of all beverages consumed by humans on any given day. In the United States, this might mean having a glass of Simply Orange or Minute Maid orange juice with breakfast.
In Mexico, it might mean grabbing a Fanta. In Asia, it might mean reaching for a Fuze tea. In Brazil, it might mean thirsting for a Del Valle mango juice. It could be having a Powerade on the sideline of a high school football game. It might be putting a coffee pod into a Keurig machine. The latest expansion is the dairy industry, where the Georgia-based titan has been developing high protein milk. It has co-branded licensing arrangements with Bacardi for flavored cocktail mixers. The list goes on and on; as expansive as the 125+ year history leading to present day.
Through its trademark protections and $100+ billion bottling network, the purveyor of the most sacred of libations possesses what has been described as a license to print money.
And print money it does. The firm generates so much free cash flow that it can't put to work that nearly all of it goes right back out the door to owners, either in the form of share repurchases or cash dividends. Nearly every year, the total shares outstanding declines and the dividend rises faster than the rate of inflation. The board of directors just hiked the annual dividend by another 8% this past week; something that is as routine as clockwork. Over the sixteen or seventeen years, the dividend has grown from $0.30 per share to $1.32 per share, or 440%, all despite the fact Coke was already the biggest beverage company in the world back in 1998.
And in 1988. And in 1958. And in 1919 when it went public at $40 a share. (In fact, had you purchased a single share for $40 in that 1919 IPO, and reinvested your dividends, it would now be worth more than $10 million. This, in spite of the fact the stock initially crashed to $19 per share shortly thereafter, representing a greater than 50% loss on paper.) It's been a key member of the Dow Jones Industrial Average and the S&P 500 for as long as most investors have been alive.
Yet, when given the choice, it seems as if very few individual shareholders prioritize the acquisition of Coke shares for the long-term. You hear people talk about buying shares of a risky solar panel startup; a new social media network; some mining stock that could hit pay dirt. It's all about getting rich quickly, rather than building wealth steadily. They talk about these things at dinner parties and over coffee. When was the last time you heard someone excitedly exclaim, "I expanded my holdings in the world's largest and most profitable beverage maker and distributor, which I'll someday leave to my grandkids"?
It doesn't happen frequently. For whatever reason, most investors aren't wired to think of common stocks like they do office buildings or high-quality furniture, which they understand has utility for more than one lifetime.
The Coca-Cola Company isn't the only example of this sort of amazing long-term holding. There are a handful of others that have similar economics and competitive advantages. I once wrote a profile of The Hershey Company detailing similar results - they've hiked their dividend by 669% over the past 18 years. McCormick & Company, the spice purveyor, is another rare enterprise that has dominated its field and survived for centuries. These sorts of special companies are rare enough that I truly don't understand why people aren't chomping at the bit to get their hands on some, not in the usual sense of "picking stocks", but as a permanent addition to the family's collection of assets that throw off passive income.
The moral of this story isn't that you should buy shares of Coke. In fact, I'd be thrilled if you ran out and sold your shares, driving down the price so my family could acquire more. Rather, it is to remind you that the next time you are tempted to buy into something that promises emotional excitement and rapid payoffs, to over-leverage yourself or take more risk than you should; consider, instead, looking to one of the 50 or 100 incredible businesses that are as close to sure long-term bets as anything in human civilization.
Sometimes, the smartest course of action is to cease being clever and, instead, write a check for shares outright, paid in full, that sit collecting dust in your safe deposit box. With enough diversification, the chances of permanent capital impairment can be greatly mitigated, leaving a whole lot of upside to enjoy decade after decade, generation after generation. Even though most people don't behave this way anymore, you and your family can be different. To dare to insist on boring, exceptional holdings rather than what is en vogue at the moment.
It may not make you popular, but it should make you richer given a long enough horizon.