Kennon-Green & Co. Global Asset Management, Wealth Management, Investment Advisory, and Value Investing

For the serious investors among you, I recommended a book about the 1929-1933 crash that is the single best statistical resource on the subject I have ever encountered.  After talking about it on the site, I’m going back through the 700+ pages and I really can’t emphasize enough how seeing the effects of the worst catastrophe in 600 years had on securities prices influenced my thinking when it came to arranging my personal and business affairs.  It costs as much as a college textbook on the used markets because of how rare it is, but I’m telling you, you are doing yourself a disservice if you manage your own money and don’t have it in your library.

Tonight, I was going back through and looking at food stocks in light of our recent discussion of the overvaluations of otherwise great businesses like Kellogg’s.  It is amazing how well food stocks held up, even in the Great Depression.  On page 56:

… the food companies had average returns on equity of 19.6%, and their stocks at their highest prices averaged 466% of book value, compared with the average for all stocks of 420%.  Food industry stocks received an average valuation in other respects, as well, during 1929.  The companies highest stock prices averaged only 22 1/2 times earnings, compared wiht the average of 30 for all leading stocks, and dividend yields on food stocks as their highest prices averaged 3.16%, versus 3% for all leading stocks.  The crash dropped food stocks to an average of 51% of their highest 1929 prices, versus 48% for all leading stocks.  At these low prices, food stocks were only 11 1/2 times earnings and yielded 6.46%.  Only the market-to-book relationship of 283% for food stocks at their low prices was better that the average of 181% for all stocks.

General Mills, which I wrote a case study on a few months ago, went from a high of 18 times earnings to 10 earnings during the 1929 crash, causing the dividend yield to go from a low of 3.93% to a high of 7.00%.  General Foods (now part of Kraft Foods) went from a high of 22 times earnings to a low of 10 times earnings, taking the dividend yield from 3.66% to 8.57%.  National Biscuit Company (now Nabisco), went from a high of 29 times earnings to a low of 17 times earnings, taking the dividend yield from 3.95% to 6.70%.  Pillsbury went from a high of 13 times earnings to a low of 6 times earnings, taking the dividend yield from 3.13% to 6.67%.

[mainbodyad]It’s easy to see why National Biscuit had the highest valuation even after the crash – it had the strongest credit rating of any of the food stocks, achieving an Aaa on preferred shares from Moody’s.  It had millions of dollars in cash on hand, sitting around to serve as a buffer against the winds of peril.  When the world is falling apart, it is sometimes better to get a slightly less lucrative deal with a greatly improved probability of survival.  Sometimes, as the saying goes, winning can be defined as not losing.

Of course, the market didn’t actually bottom until 1933, when many of these stocks fell even further, but the dividends helped put a floor on them.  At the bottom, General Mills was yielding 8.33% or so on its common stock.  

The dividend yields at the bottom were just amazing.  Going outside the food industry for a moment, AT&T was yielding more than 10% on the common stock!  Gillette Safety Razor, now part of Procter & Gamble, was yielding 13.77%.  Railroad Union Pacific was yielding 9.84%.  Woolworth was yielding 9.6%.  Wrigley gum was yielding 8.57%.  Westinghouse was yielding 14.74%.

Imagine being able to buy a boring railroad and collect almost 10% cash every year on your holdings!  It makes me want to put on a top hat, grab a monocle, and grow a mustache like Rich Uncle Pennybags from Monopoly.