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Manfred Krug is a German stage & screen actor who was the public face of the biggest and most publicly advertised IPO the nation had ever seen. Deutsche Telekom (OTCPK:DTEGF), known in the United States as T-Mobile since its acquisition of wireless carrier Voicestream, went public in November 1996 and heavily utilized the word "Volksaktie" (people's stock) which had been forged in the post-war era when government holdings of Germany's finest corporations like Volkswagen and Preussag were to be divested into public hands. However, the Telekom IPO went crazy when people who never heard about the stock market in their life all of a sudden "needed" to own these shares in order to be normal. Having witnessed the stock's 136% price increase over 2.5 years, Manfred Krug came back for the commercials in preparation of the second offering made in June 1999 and told people that now was their chance to make up what they had missed by not participating the first time. After the German stock markets' highest closing day in history 3/13/2000, price/earnings valuations began their natural contraction after the unnatural expansion during the previous years. Since Telekom shares were so heavily advertised to the public, a lot of small individual investors sold in the worst possible environment trying to protect at least some of their wealth. Manfred Krug apologized to the public in 2007, to all the people who had bought the stock he had praised and were so badly disappointed.

date

closing price per share in EUR (taken from boerse.de)

11/18/1996

16.97

06/28/1999

40.10

03/06/2000

102.70

06/19/2000

65.95

09/11/2001

14.50

06/05/2012

7.71

Telekom price development (green line showing 200 day moving average)

The first stock I ever bought in my life was Infineon Technologies (OTCPK:IFNNF). It used to be the semiconductor branch of Siemens which was spun off in 1999 and went public on March 13, 2000. Yes, you heard about this date before. March 13 marked the highest value the German stock market had ever seen. The initial public offering of Infineon was oversubscribed 33 times of the number of shares available, meaning that only about one in six stock orders were filled after a complicated lottery-like drawing process. On the first day of trading the price went from 35.00 EUR all the way up to 85.00 EUR and closed at 70.26 EUR. The first day buyers, at least the few lucky ones who had won the lottery, made a 100% profit. Soon after the tech bubble had burst on a worldwide scale, prices went down dramatically. But I didn't know anything about that stuff. My brother had worked for Siemens at the time, so thinking I had an insider who could pass me first-hand information and a price which had come down to a more earthly 35-40 EUR later that year made me jump on this supposedly once-in-a-lifetime opportunity with a couple thousand Euros of my savings. For a few months everything seemed to be alright. Infineon's price bounced back to about 45 on several occasions and of course I felt like a winner. I can't remember the details anymore but I think I finally took my losses in mid 2001 when the stock had come down to like 25 EUR or so and I wanted to protect at least some of my money like all the Telekom "investors" had done before me. The image shows you where the stock went after that...

Infineon price development (green line showing 200 day moving average)

It took me quite exactly a decade before I'd ever touch a stock again. Only this time I was ten years older, had a family to protect and feed and was on the verge of starting some decent retirement savings for the first time so I had to do it the right way now. But what is the right way when you a) have no clue how big business works, b) have no time to learn about all the stuff out there and c) swore to yourself to never again buy cash value life insurance? I wanted something I could rely on for a longer timeframe than everything I ever had done before, possibly something I could hold on to for the next 20 years.

McDonald's (MCD) has been in business for more than 70 years, steadily increasing revenue, earnings, cash flow, and last but not least dividend payout. Since 2003 earnings per share have risen on average 22.9% per year. Free cash flow per share has gone up 14.6% on average every year. The dividend checks you have received from the clown have grown by an average 25.4% since 2003 as well. The stock is, like many others, currently trading above its 5 year average price earnings valuation. If I would need to sell right now I could do that with good conscience. But I, like anybody else, don't know what's going to happen next. The price might go down considerably over the next two years. This would destroy somebody who'd be dependent on selling his shares to make a living. On the other hand it's quite safe to assume that a 70 year old business which has successfully transformed from a restaurant chain to a global real estate developer isn't going to see any severe issues with its earnings. 2007 saw a quite hefty decline in earnings with a 30% drop over 2006. The management of McDonald's boosted the dividend to shareholders by 50% to show their investors that it had high confidence in going forward or as CEO James Skinner had put it in the Q4 earnings call: "Looking ahead, while there's been some volatility in the market, we are confident in McDonald's future. Trends are in our favor and we are operating from a position of strength".

The roots of Colgate-Palmolive (CL) go back to 1806 and today it is a multinational corporation providing consumer products such as household goods, and personal care products (think toothpaste). Colgate-Palmolive was able to grow its earnings per share at an average 9% per annum for the last decade. Free cash flow grew at about the same rate with 11% p.a. in the same time. Needless to say that this company is a real powerhouse when it comes to dividend payouts. On average 90% of the company's profits are being paid out to shareholders, which results in an annual dividend growth averaging 12% increase each year. This is the kind of stock I want to own for the long term prospects of my retirement portfolio. Unfortunately at a current P/E multiplier of 25, the share price sits about 30% over its 5 year valuation so it is hard for me to justify a buy under these circumstances.

We are told that in order to retire with a decent income we need to acquire a high-growth portfolio when we're young and then start to sell parts of it every time we need income, i.e. paying rent, going on vacation or to the doctor. So you hop on the next Telekom or Infineon train and feel like a hero because you've made it. A few weeks, months later you realize that this was just the fad of the day (no, I'm not going to mention the Facebook IPO here) and that the business is worth much less than what you've paid for it.

If you needed to cash out $50,000 from your brokerage account, would you want to rely on these stocks to be at the right price? These companies had their times when everybody thought it was a must-own to become affluent. The stock price itself is, as we have seen, sort of arbitrary and not always connected to the underlying business. This is especially true during raging bull and devastating bear markets. So relying on the price of my holdings when time has come to cash out can be good or bad luck. Instead of following the crowds plowing money into new businesses and markets which still have to prove themselves to be profitable business models, try to focus on the working and proven businesses and the income they produce. They will not be the next infamous "Peter Lynch 10 bagger" within a couple of years, but they will provide you with steady growth and income for a long time.

Source: The Case For Owning Mature Companies