One reason why I often encourage investors to study in detail the 1929-1933 period in American history is because it provides a snapshot into the kind of companies that hold up reasonably well when a country's economy falls apart. And seeing that The Great Depression represents the worst economic calamity of the past 600 years, it provides a useful prism through which we can make our own judgments about how to prepare for the most realistic worst-case investing environment that we as investors could potentially endure.
When you study the business performance of mega-cap companies during the 1929-1933 period, you will likely come away with the following conclusion: the best companies to own were diversified conglomerates (think General Electric (GE)), consumer staples (think General Mills (GIS)), railroads (think Union Pacific (UNP), and water utilities (think York Water (YORW). By the way, I am not claiming that the stock prices of these companies held up well during the Great Depression, but rather, that the earnings and dividend declines were only in the vicinity of 15-35% during the worst of the period.
In particular, I'd like to talk about the one company that I would choose to own if I were forced to put my entire net worth into one company and did not have the ability to change my decision for the rest of my life: Nestle SA (OTCPK:NSRGY).
This is one of the few companies with a business model out there that actually managed to endure the Great Depression without hardly missing a beat:
Nestlé was becoming so strong that it seemed even the Great Depression would have little effect on its progress. In fact, its U.S. subsidiary, Nestlé's Food Company Inc. of New York, barely felt the stock market crash of 1929. In 1930, Nestlé created new subsidiaries in Argentina and Cuba. Despite the Depression, Nestlé added more production centers around the world, including a chocolate manufacturer in Copenhagen and a small factory in Moravia, Czechoslovakia, to manufacture milk food, Nescao, and evaporated milk. Factories were also opened in Chile and Mexico in the mid-1930s.
While profits were down 13 percent in 1930 over the year before, Nestlé faced no major financial problems during the Depression, as its factories generally maintained their output and sales were steady.
This is exactly the kind of company that you want to own if you are interested in making a permanent investment in a company that is built to withstand the worst of times. Why? Because it sells affordable products in just about every basic foodstuffs and drink category that people need or want: coffee, water, yogurt, cereal, ice cream, chocolate, baby food, pizza and other frozen foods, seasonings, cookies, performance nutrition, plus animal food. These are the kinds of products that face no threat of technological obsolescence, and are generally affordable to a decent sized chunk of any country's population.
When you look at the diverse product line, geographic exposure (this company mints money in just about every currency now that the firm has successfully established a meaningful presence in Asia and Africa, which now account for almost 20% of sales), and constant demand for Nestle's products (even in troubled times), it is likely that Nestle qualifies as the ultimate "last domino to fall" in the event of severe and prolonged economic catastrophe.
Of course, just because I think the company has an excellent business model that is a fortress of guaranteed moderate growth, this does not mean that I am encouraging investors to run out now and buy some shares. There are some serious reasons why Nestle may not belong in someone's portfolio right now.
First off, the current valuation is not particularly cheap. Normally, the ADR trades at 15-18x earnings. Right now, Nestle trades at 19x forward earnings. If you're someone who insists on a margin of safety to protect you in the event that long-term earnings growth falls short of expectations, then the current stock price does not permit that. It is possible (even somewhat likely) that stockholders for the next 5-10 years will experience total returns that slightly lag the overall earnings growth of the company.
Likewise, some investors may be deterred by the fact that the company only pays its dividends annually (this has a moderately slowing effect on compounding compared with quarterly dividend payouts for those that choose to reinvest). And because the company is located in Switzerland, you may have to deal with a withholding tax on your dividend payouts (further adding insult to injury). And lastly, you have to deal with the fact that currency fluctuations between the United States dollar and the Swiss franc will affect your returns.
And lastly, Nestle's dividend payout fluctuates with earnings (the company determines its dividend policy as a percentage of profits). Some investors may prefer the traditional policy of American blue-chip companies that try to raise dividends during bad years for the business (which is immensely helpful to those who rely on predictable income and want to reinvest a higher dividend during periods of lower prices), even if the earnings performance of the firm may not readily justify a dividend increase.
The appeal of Nestle is the strength and durability of its business model. It's not going to be a high growth business. You're not going to get 14% annual returns from this stock. But what you give up in growth you gain in stability. Nestle has existed since 1886. The products that the company sells are affordable luxuries (and, in some cases, needs), well-branded, and recession resistant. There is a lot of value in tucking something like that into your portfolio and letting it compound on your personal balance sheet for decades.