April 25, 2015

A History of the Tiffany & Company IPO and 25 Year Performance for Investors

Imagine it is 1987.  Tiffany & Company is raising money by issuing shares to the public at $23.00 each.  You have some savings and are thinking about starting a business. Instead of running your own enterprise, you decide to focus on your day job and become a co-owner of one of the most famous businesses of all time.  You buy 5,000 shares of the jeweler on the first day of trading.  Ignoring the relatively small brokerage commission, you would have needed to write a check for $115,000.  You withdrawal the stock certificates, have them registered directly in your name, and lock them in a safe deposit box at the local credit union.  It’s a lot of money, but still less far than it would have taken to buy into a McDonald’s franchise or construct an apartment building.

Tiffany and Company Stock Investors

Every share of Tiffany & Company bought during the IPO in 1987 has now grown into 12 shares and delivered decades of cash dividends on top of the substantial capital gains.

Within a few quarters, Tiffany & Company begins paying a cash dividend.  At first it isn’t much; a little under $2,000 per year.  You deposit the checks and use the funds to support your family, augmenting your salary.  From time to time, the Board of Directors announces a dividend increase and the checks grow larger as profits expand.  There are a handful of stock splits; every time you receive new shares, you take them down to add to your collection in the bank.  Otherwise, you think nothing about the company except for the few hours you spend each year pouring over its annual report.  

The past 25 years have been interesting.  The real estate crash of the early 1990’s, the first Gulf war, the dot-com boom of late 20th century, the September 11th terrorist attacks, the Afghanistan and second Gulf wars, the worst housing bubble leading to the worst real estate collapse since the 1790s, and the Great Recession, marking the worst economic collapse since the Great Depression.  In a significant portion of the years, had you watched the price of your ownership in Tiffany & Company, you would have seen it fluctuate by 50% or more, leading to large paper gains and losses in the short-term.  As a long-term investor, though, you treated it as you would a family company you owned outright.  You focused on the things that mattered: Sales, profit margins, operating leverage, and return on equity.

That focus, and a couple decades of selling diamond engagement rings, emerald brooches, and sterling silver flatware, served you well.  As of this afternoon, your 5,000 shares of Tiffany & Company would have grown into 60,000 shares.  At a current market price of $53.75 per share, you would be sitting on $3,225,000 worth of stock.  

Tiffany and Company Investment IPO Performance Retail

It turns out that over the past 25 years, the best jewel you could buy at Tiffany & Company was the business itself.  It’s minted money for its owners.

That isn’t even the best part.  You would have enjoyed nearly a quarter century of cash dividends mailed to you, which by themselves exceeded your initial investment.  In fact, with expected dividends of $1.16 per share for the year, the checks mailed to you by Tiffany & Company would amount to $69,600 annually, or $5,800 per month.  You could have lost everything else and still earn significantly more than the median American household does with two working adults selling their time, all from a single wise decision.  You didn’t have to work an hour.  You didn’t have to miss family baseball games.  You didn’t have to fall asleep at your desk trying to build your own empire. 

The down side is that very few families will ever enjoy that kind of success because they make one of two mistakes.  1.) The moment something happens, they panic and sell their stock, or 2.) They pay ridiculously overvalued prices that cannot be justified.  I think a lot of the reason is because everyone is searching for an Apple, Inc.  They want a stock that turns $100,000 into $10,000,000 in a few years.  There have only been a handful of companies in history that have done that, but it is enough to cause people spend their entire lives chasing it.  They then lose out on the great investments that could have gotten them to the same place, albeit a bit slower, and find themselves with nothing living on Social Security during retirement.  It goes back to the old saying, “the perfect is the enemy of the good”. 

It Has Been a Year Since We Looked at the Valuation of Tiffany & Company Stock

Last May, we talked about the valuation of Tiffany & Company common stock.  The shares were at $76.04 on earnings of $2.87.  Now they are $53.75 with earnings of $3.41.  That is a much more reasonable multiple.  It’s certainly not a bargain, but it at least seems fair for long-term holders by offering a return on current earnings of twice the 30-Year United States Treasury bond yield and the potential upside of much higher growth in profits over the next eight quarters, if analyst projections can be trusted.  I’d say it is fairly valued; maybe ten percent below where it would sell in a perfectly rational private purchase that didn’t involve a bidding war.

This underscores one of the most important lessons you can ever learn regarding your portfolio: The ultimate determination of the return you earn on an investment is the price you pay relative to the net-after tax, inflation-adjusted cash it generates, discounted for time.  It does not matter if we are talking about jewelry or insurance, oil or real estate, software or restaurants.  A great business becomes a terrible investment at a certain price.  Never forget that.

Your success as an investor will come down to how well you use your money to buy additional household income so that more and more cash flows through your CCDA every year.  That is why I cannot stand when someone asks me, “Is Tiffany & Company a good investment?  Is McDonald’s a good investment?  Is Johnson & Johnson a good investment?”  It goes back to Benjamin Graham’s rules: “On what terms and at what price?”.

That Is the Secret to Building Wealth and Growing Your Net Worth

If you want to be rich, the recipe that will work for most of you is to perfect your primary occupation or business; the activity or asset that generates most of the cash for your family.  Use it as a source of funds to buy ownership in companies or real estate that will grow over time.  Pay reasonable prices.  Structure it in a tax-efficient way.  Wash, rinse, and repeat for 10, 20, 30, or 50 years, and you can make a fortune without having spent your entire life slaving away for money.  

If you want to be richer, fine.  That’s okay.  It will require more commitment.  But it is unnecessary if you spend the years between 18 and 40 planting seeds left and right in the greenest pastures you can find.  A moderately successful doctor making a couple hundred grand in the Midwest should leave an estate of at least $15 to $20 million.  There is no excuse if you don’t.  It’s all harnessed mathematics.  There is no magic about it.  Add in diversification and you should be set – had you split your money between a handful of companies and one of them went bankrupt, the gains from the others would have more than offset them.

  • Gilvus

    An investor’s take on relationships: the girl’s a keeper if she prefers $2500 worth of TIF shares in place of a $2500 piece of jewelry. Bonus points if she insists on the shares being undervalued at the time of purchase.

  • Teal Thoman

    Another great write-up. Each time I read one of your articles I learn something new or it reinforces something I already knew deeper into my database for later recall. Thanks for the many years and articles. I’ve probably spent at least 50 hours learning from your About.com site and that led me to this site. I feel as though I’m getting my business degree one page at a time – so to speak. :-)

    • Joshua Kennon

      Thank you. I’m glad you found it useful. Welcome to the site!

  • AC

    Another great article – thanks Josh!
    I saw in interesting Bloomberg interview of an investment manager for high net worth individuals. He said that he basically never saw any person with a self-made net worth of over $10 million unless they were either very senior execs with significant equity stakes, professional athletes or highly successful actors or musicians.

    • Joshua Kennon

      Isn’t that exactly what you’d expect? That the only people who would seek out a third-party money manager instead of handling it themselves are those who made their fortune in non-financial areas and don’t know how to allocate capital?

      We know that business owners and founders are vastly and disproportionately represented among the ranks of millionaires and billionaires. Why would someone who knew how to handle money, and spent a lifetime building their fortune, pay another person, often much younger with far less experience, 1% to 2% of assets to do what they could handle in their sleep?

  • Jack

    A nice story. But let’s say that that hypothetical investor had also invested in a dozen other stocks and held them all this time. Some would be worthless.

    • Joshua Kennon

      That shouldn’t bother you because the mathematics are such that a single success on a long-term compounded basis can offset enormous losses elsewhere. This is one of the foundations of modern financial theory when it comes to asset diversification. That’s built into the model.

      To illustrate the concept, let’s use an extreme example. Imagine the investor had started with two stocks. One was Tiffany & Company at $115,000, and the other Acme Fictional Enterprises Incorporated at $115,000. The former did what was detailed in the article, the latter promptly went bankrupt. That is a catastrophic 50% failure rate. It can’t get much worse than that. At the end of the first year, our investor is looking at a sea of red ink. He’s embarrassed to talk about his portfolio. He has nightmares about the money he lost.

      Today, he would have still have turned the initial $230,000 into $3,225,000 (plus 25 years of dividends on the successful investment, which would bring the tally much higher) despite having experienced the terrible first year. Excluding dividends, that is an 11% compounded rate of return inclusive of the Acme bankruptcy because of the nature of how exponential returns work (e.g., by the time the one remaining investment, Tiffany & Company, had reached $1,000,000, a single good year would have generated a gain larger than the original loss of Acme.) It is all about compounding. In mathematic terms, you cannot think arithmetically. You must think geometrically, or exponentially. Otherwise, you’ll make mistakes in your analysis.

      The actual results would be even more favorable because the initial $115,000 loss on Acme would have generated a significant tax carry loss forward benefit that would have reduced future payments to the IRS.

      If the structure is right, it just doesn’t matter. You should do everything you can to avoid losses – in my career, I’ve only owned a single firm that went bankrupt out of the hundreds of equities I’ve held at one time or another – but even if you did, one or two good choices can subsidize many more bad ones. You’d still end up rich.

      • Gilvus

        Was Borders Grp. that one firm?

        • Joshua Kennon