Investors are stampeding toward "legacy assets", and actually I'm kind of surprised.
Legacy Assets is a term I use to describe timeless businesses that you can literally buy and hold forever. Historically, most folks have been far more interested in trying to strike it rich on hot startups. Interesting conversations around the water cooler has been more important than slowly building wealth.
That attitude, though, is starting to change. People are dumping riskier investments in favor of dependable dividend payers. While junior miners and internet startups struggle to raise cash, legacy assets like Clorox, ExxonMobil, and Union Pacific have held up just fine.
All I can say is, it's about time. As I've been trying to say for years, these stocks are some of the best investments out there. They stand out from the rest of the rift raft.
If there is one skill every investor should know, it would be how to pick out a legacy asset. No, they won't impress your colleagues around the water cooler. But these companies are the easiest way - that I can think of, anyway - to make real money investing.
Let's use The Coca-Cola Co (NYSE:KO) as a case study.
The first sign of a legacy asset is a timeless product or service. Can you imagine your grandchildren and great-grandchildren enjoying this product 20, 50, even 100 years from now?
If you can answer "yes" to this question, then you might be looking at a true buy and hold dividend stock.
You don't need a PhD to understand Coca-Cola. The company has produced its trademark beverage for over a century, along with a growing product lineup of other tasty drinks. People buy these items no matter what's going on with interest rates or which party is in the White House.
Unlike Apple and Tesla, Coca-Cola doesn't have to invent the next gee-wiz gadget each year. Unlike banks or financial firms, the company doesn't deal in "collateralized debt obligations" and other mumbo jumbo. Coca-Cola simply produces the same product everyday, and probably will continue for the next 100 years or more.
The second sign of a legacy asset is thick margins. This is the amount of money flowing to the bottom line on every dollar generated in sales. Wonderful businesses earn oversized profit margins decade after decade, resulting in a steady stream of dividends for shareholders.
Once again, Coca-Cola shoots the lights out here. A bottle of soda is basically just sugar water. It only costs a few cents to make. Coca-Cola, through, then sells this concoction for a buck or two.
This makes the company a cash machine. Coca-Cola's gross margins are consistently above 40%. The firm's net margins have been in the mid-teens for years. I can think of five, many six other public companies in the world that produce numbers like this.
A third sign of a legacy asset is a strong balance sheet. We want to see a lot of cash. A very low debt load is a big plus.
Coca-Cola's balance sheet is built to survive a depression (which it has done once actually). The firm has over $24 billion in cash and short-term investments. A debt load of $48 billion is modest for a company of this size. Given how much cash Coca-Cola generates, management could pay off its liabilities in a few years if they wanted to.
Avoid debt like syphilis. Too much leverage leaves your investment vulnerable to any blip in the economy. Wonderful businesses like Coca-Cola are financial fortresses that can withstand anything.
Finally, legacy assets have long histories of rewarding shareholders. Once again, Coca-Cola stands out from the pack. Shareholders have been collecting checks for 123 years, going all the way back to when Grover Cleveland was President.
Even through the financial crisis, the company managed to pass on small dividend hikes. Since 2000, Coca-Cola's payout has grown 289%. This has allowed investor incomes to keep up with inflation.
Coca-Cola, of course, isn't perfect.
People are becoming more health-conscious and chugging down less Coke. Governments looking to trim American waistlines (or fill their coffers depending on your point of view), are bringing in soft drink taxes. This has left Coca-Cola's revenues flat for years, with no sign of much growth anytime soon.
The stock is also pricey. Coca-Cola is a wonderful business, but that fact is not exactly a secret. Shares trade at 25 times earnings (expensive for a slow-growing business) and only yield 3.2%.
I not too worried about these problems, though. Coca-Cola's huge product lineup includes lots of healthy options. Emerging economies are also drinking more soft drinks, which will make up for lagging sales Stateside.
Coca-Cola's modest yield might not quench the thirst of yield-parched investors. This number, though, doesn't provide a full picture of how much cash the company pays out to shareholders. In addition to dividends, Coke spends billions each year buying back its own stock. If you were to include both dividends and buybacks, Coca-Cola's total shareholder yield jumps to a respectable 4.4%.
Bottomline, identifying the indicators of a legacy asset is the most important skill you can develop. Us income investors have known this secret for years, and it looks like the rest of the world is finally starting to catch on. In the case of Coca-Cola, these traits have allowed the company to crush the market for the past 100 years… and probably the next 100 years, too.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.