The other day I heard that Coca-Cola (NYSE:KO) had "gone nowhere" for the past two decades. Naturally I was intrigued. So I looked up a long-term stock chart to see what I could find.
At the end of June of 1998, shares of Coca-Cola reached $42.75. As I write this in 2016, shares are exchanging hands around $42.30 or thereabouts. From this view it may indeed appear that shares "went nowhere." If you look back at a long-term stock chart, you could find a $42.75 price against today's mark and suggest that shares of the company had nearly two decades of stagnation.
This would be a factual statement to make. However, it would also be very misleading. I'd like to point out five areas that can easily get glazed over in taking this sort of view.
First you have the timeframe selected. Sure, during 1998 shares traded over $42 per share. Yet you could have also purchased shares for under $30 per share during that same year. This still wouldn't provide the greatest of a returns, but it does demonstrate the concept that you ought to be cognizant of comparing arbitrary time horizons.
The next thing to consider is the valuation. Back in 1998 Coca-Cola was earning a split-adjusted $0.70 per share or thereabouts. So that $43 share price also indicated a P/E ratio north of 60. It's a testament to the long-term success of the business that the share price today is even near where it was back then. Earnings-per-share have grown by 6% annually since then, but investors would have seen effectively zero capital appreciation due to the massive P/E compression.
The next three points illustrate the idea even better. Even though it involves a bit of "cherry picking," let's suppose that an investor indeed purchased shares of Coca-Cola at the worst possible time in memory -- a price near $43 and a P/E ratio above 60 back in 1998.
While the share price is about the same, this doesn't include dividends. And for a company like Coca-Cola it doesn't include a stable and increasing payout. The dividend would have been around $0.31 on a split-adjusted basis back in the middle of 1998 as compared to closer to $1.32 today. The dividend grew by nearly 9% per annum. As a result, investors would have collected $13 or so in per share payments along the way.
So if you allowed the cash to aggregate, this brings the total value closer to $55, or an annualized return of roughly 1.5% per year. Granted this isn't a high return, but it nonetheless shows the difference between slightly negative and obviously positive.
Of course, few investors would allow their dividend payments to sit for decades on end. If you instead elected to reinvest along the way, you could bump your total return up to 2.4% or so per year. Again this isn't overly impressive, but remember that you're starting with the worst valuation in memory. The starting yield would have been just 0.7%. You get a benefit of being able to reinvest in the $20s for the 2000 through 2010 period, but the amount of beginning payments generated isn't especially high. Still, it shows that the result becomes more positive.
Finally, it's an unlikely circumstance whereby you invest just once -- in this case the worst possible time -- and then go sit on your hands for a couple decades and hope that things work our alright. The media depicts this a lot -- selecting a high date and saying shares have "done nothing" for this amount of time -- but very few people invest that way.
Even if you wanted to, it's unlikely that you would be able to make a single lump sum investment at a given time; the vast majority of people get paid periodically -- biweekly or monthly -- and not by the decade. You can't go to your employer and ask for your next 10-years worth of paychecks. Instead, you get paid regularly and that tends to be how people invest as well.
Taking this into consideration, your first investment would have been unimpressive -- 1.5% to 2.5% depending on if you chose to reinvest. Yet if you decided to allocate the same amount of capital year-in and year-out you could be doing much better. You would have had the opportunity to buy at $22 in 2001, $21 in 2005, $24 in 2009 and even under $40 last year. In fact, aside from the end of 2014 and a period in 2013, you could have invested any time in the 1999 through 2015 timeframe and seen a positive result today.
If you elected to consistently invest and reinvest in Coca-Cola (as many people do) say at the mid-point of each year, your annualized gain would have been over 7%. Again perhaps this is nothing to text home about, but the point is that there's a big difference between two decades of stagnation or a fine wealth building opportunity. And naturally the results can be more impressive with other securities.
All too often you hear these "gone nowhere" notions, without also learning about the positive qualities associated with a security. In this case, even if you had purchased shares at the worst moment, you still would have seen positive returns. Moreover your gains would start to increase as you reinvest and deploy "fresh" capital.
This is the sort of thing that makes the investing world fun in my view. Even if you tried to find a terrible result for a company like Coca-Cola, the long-term business performance still allowed for a reasonable outcome Warren Buffett, incidentally a large Coca-Cola shareholder, had a particularly astute observation in this regard: "Time is the friend of the wonderful company, the enemy of the mediocre." In this instance you can see what he's talking about.
Disclosure: I am/we are long KO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.