After writing about the 20 year performance of Colgate-Palmolive stock, my Aunt Donna asked me about Dawn dish soap, which is owned by Procter & Gamble. I broke out the historical dividend charts and went to work to create a comparison of how an investor would have fared had they parked money in P&G twenty years ago and walked away, forgetting about it until now. Here is what I found …
Imagine it is the first trading day of 1991 and you have a single tax-free IRA with $100,000 in cash in it. You decide to invest in shares of Procter & Gamble. You buy your block of common stock, forgetting about the transaction for twenty years. A share of Procter & Gamble traded for $6.88 split-adjusted at that time so you would have been able to get the equivalent of 14,535 shares of stock.
In the twenty years that followed, despite multiple recessions, including the worst meltdown since the Great Depression, the dot-com bubble and the housing bubble, multiple international wars, ballooning government deficits, exploding national debt, and a maelstrom of regulatory changes in the financial industry, you would have prospered.
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Specifically, your shares would have had a market value of $64.58 on the last trading day of 2010. That would give your 14,535 shares a total market value of $938,670. In addition, you would have collected $16.75 in cash dividends per share throughout the two decades you held the stock, including a one-time special dividend issued by the company in 2002 for the Jif/Crisco spinoff, meaning you’d have $243,461 in cash.
Your $100,000 in Procter & Gamble Stock Would Have Grown to $1,182,131
Your account, which began with $100,000, would be holding $1,182,131 in stock and cash. That is a return of 13.14% without dividends reinvested over twenty years.
Shares of Procter & Gamble have generated tremendous wealth for owners over the past two decades from manufacturing dozens of world-famous household brands.
“What about inflation?” you ask. A $1.00 bill in 1991 was worth only $0.62 in 2010 so the real, inflation-adjusted value of the account in 1991 dollars would be $732,921. That is still a real return of 10.47% compounded without dividends reinvested over 20 years.
That is one hell of a deal for someone who didn’t have to do anything except read the annual report each year to make sure that profits continued to rise, debt remained manageable, executives weren’t overpaying themselves, and the products the firm sold were still relevant to consumers. It’s even more impressive when you notice that we didn’t assume you reinvested your $243,461 in dividend income. You could have spent it, given it away, or even used it to invest in bonds to generate some interest income. Had you plowed it back into Procter & Gamble stock, you would have had even more wealth, and even higher dividend income, as you increased your ownership of the business.
Why don’t most people experience these types of returns? They trade. They try to “rent stocks instead of owning businesses”. Instead of focusing on finding a good business with a competitive moat, that generates high returns on non-leveraged equity capital, making sure they pay a fair (or cheaper) price than it is worth on a conservatively estimated basis, and holding on for a long time, they buy and sell stocks, generating commissions for their broker, spreads for market makers, taxes for the government, and needless volatility for other shareholders.
The older, wiser, richer, and more experienced I grow, I become more convinced that the average 18 year old would do well to take $10,000 per year and put it in a few different asset classes including shares of a solid, boring, reasonably priced enterprise, reinvest the dividends, holding the position through a tax-advantaged account. If repeated year after year until retirement at age 65 with two or three dozen firms making it into the portfolio, it is not difficult to imagine a seven or eight figure portfolio throwing off hundreds of thousands of dollars a year in cash. You could be a D- student, a middle school drop-out, or a complete failure at nearly everything and it would still work for you if you focus on risk management by not overpaying for your shares. For those who can’t value individual companies, index funds provide much of the same benefit without the bottom-up approach.
Oh, and one more thing: Just like almost every stock in the world, you would have experienced at least one or two 40% to 50% drops in the market value of your Procter & Gamble stock during your holding period. That is the price of generating wealth through stock ownership. If you can’t handle that, park your money in the bank and be content with the meager returns that are available. As Benjamin Graham said:
The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down.” – The 1949 Edition of The Intelligent Investor
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Reader Comments (12)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Aunt Donna
July 19, 2011
Maybe this is where I should have "parked" the shares I had for years! Oh well, it was only money! (sigh) lol
Dennis The Menance
November 11, 2011
I would like to comment about procter and gamble. I can think of many stocks that are better values than procter and gamble. Although the consumer products company may be very profitable and a very popular stock this does not make it a bargain. I have a website where I research stocks under five dollars. Their are many bargains among stocks trading between 1 dollar and five dollars a share. It just takes much time and effort to find them.
Dennis The Menance
November 26, 2011
Why is it that everybody buys the most popular stocks. If you do this your are doomed to get only average returns over time. Why not focus on decent companies that are extremely undervalued instead. I bought a stock called seaboard corporation About 7 or 8 maybe 9 years age something like that and paid 190 dollars a share. I sold my shares about 5 years later for 2500 hundred dollars. The company was profitable when I bought it and profitable when I sold my shares. Bear in mind I would not say anything that I cannot back up believe me. I will give an example of a compny of really decent quality that I consider really undervalued. The company is Bunge Limited symbol {BG} engages in the agriculture and food businesses worldwide. The stock currently trades around 60 dollars a share. I think the stock could easily get to 450 dollars a share over the next five years. Yes you heard right four hundred and fifty dollars a share assuming their are not stock splits. And what do I base this on If the companies profit margain expands from around the current 1.75% to 4% over the next five years and if the sales of the company expand from 55 billion to 85 billion thats growth of about 7 or 8 percent a year and if the companies stock than trades at a price earnings ratio of 20. Keep in mind that their are stocks that are popular that trade at much higher price earnings ratios than 20 times earnings one example is whole foods market it currently trades at 35 times earnings. Also keep in mind that bunge is a company of really decent quality not at all a high risk stock. It has the potential to leave a company like procter & gamble in the dust. I understand your skepticsm if you are reading this but go to any stock broker of financial planner CPA that knows how to value stocks and they will confirm everything that I Im saying here.
Dennis The Menance
November 26, 2011
Why is it that everybody buys the most popular stocks. If you do this your are doomed to get only average returns over time. Why not focus on decent companies that are extremely undervalued instead. I bought a stock called seaboard corporation About 7 or 8 maybe 9 years age something like that and paid 190 dollars a share. I sold my shares about 5 years later for 2500 hundred dollars. The company was profitable when I bought it and profitable when I sold my shares. Bear in mind I would not say anything that I cannot back up believe me. I will give an example of a compny of really decent quality that I consider really undervalued. The company is Bunge Limited symbol {BG} engages in the agriculture and food businesses worldwide. The stock currently trades around 60 dollars a share. I think the stock could easily get to 450 dollars a share over the next five years. Yes you heard right four hundred and fifty dollars a share assuming their are not stock splits. And what do I base this on If the companies profit margain expands from around the current 1.75% to 4% over the next five years and if the sales of the company expand from 55 billion to 85 billion thats growth of about 7 or 8 percent a year and if the companies stock than trades at a price earnings ratio of 20. Keep in mind that their are stocks that are popular that trade at much higher price earnings ratios than 20 times earnings one example is whole foods market it currently trades at 35 times earnings. Also keep in mind that bunge is a company of really decent quality not at all a high risk stock. It has the potential to leave a company like procter & gamble in the dust. I understand your skepticsm if you are reading this but go to any stock broker of financial planner CPA that knows how to value stocks and they will confirm everything that I Im saying here.
Joshua Kennon
November 26, 2011
Replying to Dennis The Menance
We've had this discussion a few times elsewhere on the site. As a general rule, I tend to buy companies no one has ever heard of, from regional insurers to food processing plants, that are cheap relative to growth and intrinsic value. (I'm familiar with Seaboard, actually, from five or six years ago though I never bought any shares), though that has not been the case over the past few years because the Great Recession meltdown gave me an opportunity to buy ownership in some of the giant blue chips that I can own for decades and decades to serve as an augmentation to my primary investment vehicles, which are the family businesses.
I think some big reasons you only hear people talk about 'the popular stocks' are: 1.) They are popular for a reason, by definition, more people own them, 2.) they have sufficient market capitalizations to be discussed without influencing the market price possibly drawing the ire of regulators, and 3.) they are simple to understand because folks are familiar with them; virtually everyone knows what it is like to eat at McDonald's or shop in a Walmart.
On this site, I follow a rule to only discuss mega-capitalization companies that everyone knows about and can study.
For the average person, though, I think it would be a mistake for them to try and identify small, undervalued companies. One Morningstar research study showed that the average investor earned only 3% on his holdings, while at the same time his holdings generated 10% returns, because he was buying and selling all the time, trying to find deals or do something "smart". That means your average school teacher, plumber, manager, construction worker, lawyer, or doctor is going to probably have far better results buying a basket of great businesses at reasonable prices, reinvesting the dividends, and focusing on their career as their money silently compounds in the background. They would already be leaps and bounds ahead of their contemporaries by doing that, but it is too easy. Due to a mental model called action bias, people need to feel like they are "doing something", even if that something is stupid.
In other words, the average person isn't getting average results because they aren't buying and holding, which is a big part of the average results calculation. Trying to get them to identify an early stage retailer with great prospectus and a strong balance sheet is going to lead to disaster in more cases than not. For them, being average is vastly underrated. They are, again looking at the data, far more likely to end up rich if they TRY to be average since most people fail at even that. Average is vastly underrated for those who don't want to become obsessed with finance and spend their days thinking about cash flow statements.
You're also discounting the fact that not everyone likes to think about business and investing all the time. I love it. You sound like you enjoy it. Some people hate it. There is enormous utility to them to be able to buy a set amount of ownership in General Electric, Johnson & Johnson, Procter & Gamble, Coca-Cola, and Exxon Mobil every month. Once a year, they look over the annual report to make sure everything is okay and then go on with their lives, sleeping well at night even if the stock market crashes because, given enough time, they should be fine if history is any guide. For those with a anything-but-complex-numbers mentality, or who are bored by finance, that's a sweet deal.
Ed McAninch
July 25, 2016
Replying to Dennis The Menance
Well Dennis, it has been about 5 years and BG stock is still in the $60 range.
Sam
May 8, 2017
Replying to Ed McAninch
I'm surprised you couldn't hear the sales pitch music in the background, clearly this man is involved with the company
Ed McAninch
May 9, 2017
Replying to Sam
Well, at least they have been increasing their dividend at a reasonable rate, but you are right.
Jimmy D
March 2, 2013
About a month ago my grandma passed away and my grandfather passed about 4 years prior. My grandfather was a great local businessman, owning a small real estate portfolio in modest town. We always knew that they held some stocks as my grandma always referred to her stock checks. Going through things after she passed we found her stock certificates and they had practiced nearly exactly what you speak of here. After my grandfather sold his Animal practice in the mid 90's they parked a majority of their free cash in PG, GE, and DE and did not touch it, ever. Their small investment turns out to be worth about 2 million dollars today, not to mention all the dividends over the years that they used to spoil my cousins and myself. This coupled with owning undeveloped land that is worth $750,000 and other commercial real estate that is worth ~$500,000 with current rent paying tenants shows how average people with modest income can be quite wealth from setting and forgetting. Unfortunately they passed earlier than we all would have expected given their constant energy and zest for life, they lived more than a full life and where prepared financially to live a much longer life.,
Kanad Bandyopadhyay
April 17, 2013
But isn't the stock doing as well in India vis a vis Colgate India? What is your take on this?
Jeffrey Whittaker
January 11, 2014
I think that's a great analysis done here! But what keeps me and most other people in poverty is the sell high theme that Americans seem to be obsessed with! If everyone sells high the poor can't get in! We must build a financial system that steps down like city buses for the little people!
Stephen H
August 3, 2015
I've had MCD for over a few years now and I never lose sleep over it. Seeking Alpha articles have been declaring it toast compared to the new up and comers, yet I'm not worried. I drive by and it's still packed. They still generate piles and piles of cash and keep increasing my dividends. Your blog has been great for reminding me that the economic engine that generates wealth is what you own, not some number that changes day in day out on an electronic screen. Great stuff!