Recently, I came across the notion that JPMorgan (NYSE:JPM) had "gone nowhere" over the last 20 years (actually "precisely nowhere"). This sort of perception is quite common in the investing world. Investors may glance at a stock chart or think about the dividend cut, and it's easy to nod along with this idea.
Yet, I find that this can be a hazardous way to go about the investment process, especially if it drives your future decisions. I'll show you what I mean.
Twenty years ago, shares of JPMorgan were trading hands at a split-adjusted price of about $24. Today, that number is closer to $60 - or a 150% increase in the last two decades. Naturally this is quite far from "nowhere."
In addition, you have to add in the dividend component. This portion came to roughly $23 a share, an idea that I find particularly interesting. Everyone talks about the significant decrease in share price and the dividend cut for JPMorgan during the most recent recession. Yet few people talk about the idea that the very long-term owner would have collected nearly all of their beginning investment back in the form of cash payouts during the last 20 years. Granted this benefit is lessened in purchasing power terms, but it remains a significant driver of value. (And that's before thinking about reinvesting or redeploying.)
The total value today would be around $83 per share, representing a nearly 250% gain or a total return of over 6% on an annualized basis. Contrary to "going nowhere", a $10,000 starting investment would now be worth about $35,000. This is the sort of thing that can be easy to miss. A lot of people willingly write off investments like JPMorgan because of their "poor history" and yet never actually consider what that history might have been. We're not talking about spectacular results, but it should be clear that it's a long way away from "nowhere."
A better argument could be made a bit later on, when shares were trading around $60 at the end of March of 2000. So here you have 16 years of stock price history and we're at the same beginning and end points. Here's a point where you could say that shares "went nowhere." Yet even this characterization has some flaws.
First, you still have to consider dividends. Over this time, you would have collected $20 or so in per share dividends, leading to a total value closer to $80 as compared to the share price of $60. For the investor of 2000 to just break even in nominal terms by 2016, you'd need to see a share price around $40, and that's prior to thinking about reinvestment. In this scenario, your return isn't spectacular, but it is about 33% higher than what you might glean from a long-term stock chart.
Next you could think about reinvestment, which can add a percent or two to your annualized return for JPMorgan depending on the timing and frequency of reinvestment. Or it could have been used to redeploy into other productive companies, leading to more stakes and cash flow streams. Stock charts won't tell you what happened if you reinvested your dividends along the way into Johnson & Johnson (NYSE:JNJ) or say McDonald's (NYSE:MCD), but this is the actual practice of many investors.
Finally, and perhaps most importantly, as nice and clean as it is to think about investing from one point to the other - in this case 2000 to 2016 - that hardly reflects reality. People invest regularly and over a great deal of time. You don't just pick out the worst possible time to invest and then sit on your hands for the next couple of decades hoping things work out alright. Even if you wanted to invest this way, the vast majority of people are not paid in a decade-long lump sums. Instead, you get paid on a frequent schedule - say biweekly or monthly.
As such, this also happens to be when you choose to allocate capital (or it's done automatically for you). The JPMorgan employee doesn't utilize their stock purchase plan just a single time, instead it's reflected and executed on each paycheck. So a more realistic view on a long-term owner is someone who purchases shares on a regular basis and not just a single time.
I'll save you the math, but this is what that amounts to: if you invested $1,000 each March, a $16,000 nominal investment would now be worth $27,000. If you decided to reinvest along the way, the end number is closer to $30,000. Every single $1,000 March investment would now be worth more than that - ranging from just over $1,000 to nearly $2,600.
This is the sort of thing that people miss when they suggest that a security has "gone nowhere" over a period of time. The first thing to note is that there's a difference between "nothing" and somewhat substantial. I know if can be hard to see on a long-term stock chart, but the value created by owning shares of JPMorgan between 1996 and 2016 has been much more than a footnote. Investors would now be sitting on a gain that's 3.5 times what they started with (including effectively collecting all of their nominal investment back in the form of cash dividends).
Perhaps just as important is the idea that just because a stock price doesn't go higher, this does not simultaneously indicate that all is lost. As illustrated above, even if we pick a better (or worse depending on your view) time frame, it still doesn't amount to "going nowhere" over the long term. The share price might be the same as it was 16 years ago, but that doesn't take into consideration dividends, reinvesting or adding new funds. Each of these components can add materially to the process and, indeed, it nicely demonstrates the difference between "nowhere" and meaningful wealth creation for the long-term owner.
Disclosure: I am/we are long JNJ, MCD.
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.