In a recent article I provided an updated view on a classic Warren Buffett Coca-Cola (KO) story. I've referenced this story many times before, so for those of you that are interested you can either click on my article link or else watch the video here. The point of Buffett's account was that while the future is always uncertain, partnering with the best businesses is often more important than getting the precise timing correct. Specifically, Buffett indicates that a $40 investment in Coca-Cola in 1919 would have declined to just $19 in the next year, but eventually would have grown to over $5 million today.
To add to that story - perhaps updating it a bit - I thought that it might be interesting to see what a Coca-Cola investment from 1970 would look like. In the end I concluded that an $82 investment in 1970 would have turned into about $12,000 today. Yet that wasn't the takeaway. The important part was this:
"Considering the companies that you want to own for the very long-term is often just as essential as thinking about the valuations that the market is offering."
And in general the comment section took one of two turns. For the most part it was complimentary. For those that had differing views it appeared that they fixated on the exact timeframe or security mentioned. It always seems odd to me that readers preoccupy themselves with such things when that's rarely the point at hand - I seldom focus on literal exacts. Rather I'm simply trying to develop investing ideologies and simultaneously happen to use real life examples. I could be more general and wind up with the same philosophies, but for some reason I believe people would get tired of hearing about XYZ Corp and [insert your investing period of choice here].
Anyway, one comment in particular struck me as a bit misguided. In effect, it suggested that I "cherry picked" Coca-Cola as an example, when in reality I was simply working off Warren's story. I'll paraphrase:
"No one ever does an analysis on the "unlucky" shareholder who held GE, one of the most loved dividend stocks for 2 decades."
Ask and you shall receive. On the surface, this seems like a perfectly rational argument. Aside from the misleading connotation that I specifically chose a certain stock, we all know that General Electric (GE) suffered mightily during the most recent recession and had to dramatically slash its dividend. In turn, it would be more than fair to assume that a large portion of dividend growth investors would have been partnering with this company at that time. Case closed, argument won, right? Not quite.
My contention is that even when you come up with a classic bad news dividend story, it's possible that one's memory could simply be too short. Ironically, this was one of the fundamental points that I was trying to detail in that article. Let me show you what I mean.
Below I have included an Earnings and Price Correlated F.A.S.T. Graph for General Electric going back to 1993. If we look at just the past few years we can clearly see that both GE's earnings and dividend fell off a cliff. The earnings peaked at $2.34 a share in 2007 before dropping to just $1.10 in 2009. In addition, the dividend fell from a high of $1.24 in 2008 to just $0.46 in 2010 - surely devastating for those relying on the tried and true consistency of GE's earnings stream. In addition, the current annualized dividend - $0.76 a share - is still well below the pre-recession mark. In viewing the 20-year history, we see that GE was more than consistent prior to the recession, but is still trying to get back to that mark today.
So why do I bring all of this up? It's straightforward really: without looking into the data it might appear that GE was the classic great dividend stock gone sour. The exception that proves the rule suggesting dividend growth investors can't rely on holding great companies for the long-term. But in this case, that's simply not true.
Below I have included the Performance Results table from F.A.S.T. Graphs dating back to October of 1993. To dispel any "cherry picking" rumors this amount of time - 2 decades - was the precise period in which the commenter referenced.
What we see is a true dose of reality. On October 29th of 1993 GE was trading at a split adjusted price of $8.08. Today it trades at about $24 a share. In turn, this represents a roughly 5.6% annualized rate of capital appreciation. Surely not exceptional, but I would grant impressive for a company that saw its earnings halved during the last business cycle. More noticeably, if you add dividends to the mix GE provided a total return of 7.9% a year during this time period. Said differently, despite the seemingly obvious folly of a long-term GE shareholder, they still would have enjoyed total returns that ousted the S&P 500 index over the same timeframe. And these results would have been even better had you reinvested or redeployed the dividends.
Perhaps most significant for the income investor is the total dividends paid number: $15,914.90; which represents over twice as much in payouts as the index. Even the massive dividend cut didn't exactly paralyze the "growing stream of income" thesis. If you bought shares of GE in 1993 and then fell asleep for the next 20 years, you would have seen your dividend grow from $0.22 a share to today's $0.76 annualized mark - over a 6% compounded yearly increase. Depending on GE's prospects moving forward, this seemingly devastating and unforgivable dividend slash might eventually be a blip on the very long-term investor's radar.
In effect, the point is that even when things seem disastrous in the near-term, it's always good to take a step back and look at the bigger picture. All too often we focus on recent events, consequentially applying a larger weight to this temporary inconsistency. Even with short-term missteps - in GE's case a tumble -we have seen that satisfactory returns can be had in the long-term.
It should be made clear that I'm not disputing the fact that the GE dividend cut would have been rough for those who chiefly relied on its apparent consistency. However, I would contend that an argument against holding a collection of wonderful businesses (even if some falter) is disingenuous at best. In this specific example, if an 8% annualized return, beating the market, generating twice as much dividend income and growing one's payout by 6% a year for two decades is "unlucky" then sign me up for "unlucky" all day long and twice on Sundays.