While there is probably no such thing as a "typical" ten-year period to use as a proxy (for instance, the 1999-2009 period starts with a bubble boom and ends with a depressed economy), the current 2003-2013 period provides a useful measuring stick because the prices and general state of the economy in 2003 was close to something we could consider "normal", and plus, the intervening decade witnessed the full boom-to-bust-to-recovery business cycle.
Let's take an aerial look at how the best-in-class dividend bluebloods performed during this period from an operational perspective:
Since 2003, Chevron (CVX) has increased cash flow per share every year except for the 2008-2009 period. The company has grown earnings every year except for the 2008-2009 period, and a 1% decline from the 2011 to 2012 period. For a cyclical business, that ain't bad. Oh, and dividends went up every year, from $1.43 in 2003 to $4.00 per share today. All in all, Chevron investors saw earnings increase 15.0% annually and dividends increase 8.5% annually over the past ten years.
In the case of IBM (IBM), the cash flow per share and earnings per share increased every year since 2003. While tech companies can be particularly vulnerable during recessionary periods, IBM was able to rely on its strong services component (which gives the company the ability to generate monster cash flows that can be thrown at stock buybacks) to increase earnings from the 2008 to 2009 period. The proof is in the pudding on this one, as IBM managed to grow earnings per share by 12% during arguably the worst economic year since the 1973-1974 recessionary period. Additionally, IBM's dividends grew every year during this period, increasing by 18.0% annually while earnings grew at 12.0% annually.
At Procter & Gamble (PG), the general narrative for the company has been that the firm is losing market share to Colgate-Palmolive (CL) and Kimberly-Clark (KMB), has lost its mojo, and is far away from the glory days of its past. While those storylines contain truth, they do not tell the whole story.
Over the past decade, P&G has increased cash flow per share every year except for experiencing an $0.11 decline in 2009, and a penny per share decline from 2011 to 2012, when cash flow per share effectively treaded water. In this case, cash flow per share is a more revealing statement about P&G's long-term profit potential than earnings per share, as the company has had a series of one-time writeoffs in 2010 and 2012 that skew the earnings figures a bit. Even counting those irregularities, P&G managed to grow earnings per share by 9.0% annually over the past decade, while growing dividends at 11.0% per year.
And then there is Coca-Cola (KO). From an earnings predictability perspective, this company is about as good as it gets. It's almost guaranteed like clockwork that the company will be generating more year-over-year profits in nine years out of every ten. There is a reason why this company is Buffett's second largest common stock position. Reviewing the 2003-2013 period, we can see that cash flow per share always went up except for a $0.04 per share decline from 2008 to 2009. Dividends have gone up every year for half a century. How much more stability can you honestly ask for than that? Earnings have gone up by 9.0% annually since 2003, and dividends have grown at 10.0%.
To throw a retailer into our analysis, let us take a quick look at Wal-Mart (WMT). This company's relentless profit performance is impressive any way you slice it. Since 2003, sales per share have increased every year. Cash flow per share has increased every year. Earnings per share have increased every year. Dividends have increased every year. Everything for this company has been going up by double digits: over the past ten years, sales per share has increased by 10.5% per year, cash flow per share has increased 12.0% annually, earnings have gone up by 11.5% annually, and dividends have gone up by 18.5% annually.
In Exxon's (XOM) case, we can see why some people stick with this tortoise of the investing world. This company just gushes out profits, buys back the stock, and raises the dividend. Wash. Rinse. Repeat. Since 2003, cash flow and earnings per share have increased in eight out of the past ten years. Dividends have increased every year during this past decade, and for the two decades before that. In total, we're looking at a company that has increased earnings per share by 12.5% annually since 2003, and dividends by 7.0% since 2003 (although the company's last two dividend hikes may presage a new normal of 8-12% dividend increases).
And then there's Johnson & Johnson (JNJ). A cash flow and earnings chart for this company is a thing of beauty. Other than a one cent drop from 2008 to 2009, cash flow per share increased every year from 2003 to 2013. Looking at normalized earnings, the company has grown its earnings base every year since 2003. And, of course, the dividend's been going up every year for half a century. For the past ten years, cash flow has gone up 10.0% per share, earnings have gone up 11.0% per share, and dividends have gone up 13.0% per share. Even through the recalls and the recession, this company slogged forward.
I told you these little stories for a reason. I wanted to give concrete examples of what the trajectory of excellent businesses can look like in the real world. Charlie Munger has said that his favorite business is a company that increases its intrinsic value over time. In his biography, he mentions that he looks to see intrinsic value increases over five-year rolling periods. The benefit of the companies I mentioned above is that, in eight or nine years out of ten, the intrinsic value increase will be unfolding right before your very eyes.
This fact is what can make blue-chip investing a "win win" strategy. We all know that stock prices can do one of two things: they can go up or go down (err, I guess three things if you could staying the same). When the price increases, you are making money as the share price adjusts to reflect a growing intrinsic value. But here is what makes things fun: with the companies listed above, you can be reasonably assured that as the prices decline, the companies are truly becoming cheaper. A lot of times, you even get the instant gratification of seeing cash flow, earnings, and dividends increase as the price falls (and occasionally, during times of severe economic distress, you must tolerate short-term declines in profits and your solace is the fact that the earnings/cash flow declines are temporary and understate true long-term earnings power).
In a lot of ways, that is the secret to long-term investing. You just limit your investing universe to companies with high likelihoods of regular increases in intrinsic value so that you know you can buy more shares when the stock price declines because the company is truly getting cheaper. When you are dealing with companies that display the relentless operational excellence as noted above, you can have the confidence to welcome price declines as opportunities to buy more, and regard most price advances as reflections of the company's growing intrinsic value.
Everyone has their own way to implement a "hedged" investing strategy. For me, I prefer to do this: buy companies where the course of action is clear: when the price of the stock advances, I sit back and do absolutely nothing, letting the dividends accumulate. When the price declines by a meaningful amount, I buy more. That kind of simplicity does not work for 99% of the stocks out there. That's why I spend my time focusing on the kinds of companies mentioned in this article, because they deliver the kind of predictable business results that can make the decisionmaking process as clear as you can expect.