Wrapping Presents and Getting Ready for Christmas Eve
We’re at home wrapping presents, baking cookies, and getting ready for the family dinners that are coming up in the next couple of days. Since Aaron and I are gifting stock this year – almost all of the transactions were completed yesterday with a settlement date of the 26th – there isn’t a lot left for us to do. However, to give the kids something tangible they can open under the tree from us, we went and got industrial size boxes of their favorite candy along with an explanation of how their stock in The Hershey Company is going to work.
In short order, they will begin receiving a check from Pennsylvania every three months for their share of the profits selling Hershey bars, Rollo caramels, Reese’s Peanut Butter Cups, Hershey Kisses, Kit Kat bars, Twizzlers, Almond Joys, Jolly Ranchers, Mounds, York Peppermint Patties, Ice Breakers Gum, Heath bars, 5th Avenue bars, Krackel bars, Milk Duds, Mr. Goodbars, Symphony Bars, Whoppers, Whatchamacallit Bars, Good & Plenty candies, Payday bars, Zero bars, Bubble Yum Bubble Gum, Hershey’s chocolate syrup, Hershey’s cocoa, Cadbury cream eggs, and more.
When the checks arrive, they can either reinvest the money into more shares, spend them on toys or books, or, in some limited circumstances, give them to charity. The goal is to forge the emotional connection between owning high quality, cash generating assets and the utility of receiving the passive income stream; for them to see that not only will the dividend income grow each year, but they can work and buy more shares to get even more money. It’s also to teach them the importance of holding during collapses and crashes. As I’ll have effective control over the portfolios for between 13 and 21 years until I turn over the assets to them, they won’t be able to liquidate even if they experience fear from watching their money disappear on paper.
One of our nephews gets a box of 36 Reese’s Peanut Butter Cups along with his shares as they are his favorite candy …
Our niece gets a box of Rolo caramels along with her stock as they are her favorite candy …
Another of our nephews gets the old fashioned Hershey’s milk chocolate bars along with his stock …
It may seem odd that we made the transfer at a time when I consider Hershey’s shares to be overvalued. I’d much rather see them in the $80 to $90 range at most. At the moment, they are richly valued at more than $105 per share. In the long-run, I don’t think it will matter for reasons laid out here. For each share they receive, they’ll get $2.14 in cash dividends per annum, with that payout presumably growing at 9.5% on average over the coming decades (the analysts are estimating several percentage points higher but I prefer conservatism). If that turns out to be the case, every share they receive today, without reinvestment, will distribute a cumulative $176 in cash by the time they are our age, boasting a dividend rate of $18.90 per share per year by the end of the period. This tells us that, assuming valuation multiples are comparable, the stock would be worth around $945 per share on a pre-split adjusted basis. That would indicate a total ending value of $1,121 before inflation, taxes, and discounting, without reinvestment. (I just wish the stock would fall to $50. I’d be ecstatic.)
I think some multiple compression would be reasonable, but even lopping off a good deal at the end is still more than satisfactory considering the goal is to educate them about investing using a company they can understand at ages ranges between 3 and 8 years old. Along the way, I’ll slowly introduce them to other assets, possibly including things such as convertible preferreds, bonds, REITs, MLPs, royalty trusts, and maybe, when they are older, conservatively structured stock options. This is a real-world, didactic, on-going investing workshop that I want to compound at an acceptable rate, but for which compounding is only one of the objectives. Turning them into experienced, financially literate adults is the prime goal. Whether they grow up to be artists, musicians, teachers, entrepreneurs, software developers, pastry chefs, authors, dentists, or whatever, the real gift I’m going to give them is not the capital, which will certainly help, it will be the ability to look at an enterprise and value it; to examine the financial records and think rationally about ways to reduce risk; to objectively measure opportunities and rank them based on their own personal considerations.
Those talks, though, will have to wait for the future. At least in the case of the 3 year old. He is currently obsessed with Teenage Mutant Ninja Turtles so whenever we get together, he has me watch them with him on YouTube for hours. I’m guessing I’ll spend most of tomorrow watching TMNT In Space. It is my fate. I gladly accept it. One of my favorite things in the world is how he pronounces the show title, which I finally recorded on my phone so Aunt Donna could hear it:
The other gifts are done, too. Some people got electronics, some gift cards, some Le Creuset stuff. My personal favorite is something we ordered for my brother-in-law. He’s a pilot and firearms enthusiast so I found this replica shotgun shell thermos that is so awesome I want one for myself. They come in red, green, and black. Look at this thing! It’s freaking sweet! If I had hunting grounds of family farm, I’d have ordered them in bulk and given them to everyone, maybe had the name and logo of the property engraved on it.
I really, really want one of my own.
The top of the thermos …
I can’t remember how many ounces it holds but it’s a good sized container. With winter starting, I figured it would be nice for him to have, either to bring a hot drink or soup or something when he’s out at the airport for long stretches, in the cold.
I should probably go to bed. We’re going to be with family all day tomorrow and I’m not sure how much sleep I’ll get, depending on whether I decide to cook anything.
Update: This post was written years ago, prior to when we launched our fiduciary global asset management firm, Kennon-Green & Co.®. At the time, we were private investors living in the Midwest. We have since divested our other operating companies and relocated to Newport Beach, California in order to have kids through gestational surrogacy. Nothing in this post, the comments, or in any of my other responses written on or through this personal blog was intended to be, nor should be interpreted as, investment advice. Any mention of intrinsic value estimates were personal estimates at that time and both can, and have, changed materially as a result of subsequent developments.
Reader Comments (36)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
dave (nestle)
December 24, 2014
I would just like to say that it's been a another great year reading this blog!
I have learned so much from each and every one of you from all the posts, comments, and conversations back and forth. I have so much new knowledge and so many options for things to further research that my head is spinning.
The entertainment value here is incredible also. Things like "the $10 toaster people", the one guy's "Jerkstores" moniker, and the "sniffing cocaine off a hookers arse" quote still make me crack up. (the latter was so unexpected that I remember choking on my beverage when I read it)
Thank you all too for putting up with me 🙂
I wish Joshua, all the Kennons and Greens, and each and every one of you a very Merry Christmas and/or an extremely Happy Festivus !!!
Dave
jerkstores
December 24, 2014
Replying to dave (nestle)
Happy Festivus to you as well.
Roundball
December 24, 2014
Replying to jerkstores
Your username really is the best.
Joshua Kennon
December 27, 2014
Replying to dave (nestle)
Merry Christmas to you and your family, too, Dave!
innerscorecard
December 24, 2014
Merry Christmas!
Joshua Kennon
December 27, 2014
Replying to innerscorecard
Likewise!
I thought about you earlier tonight because I was reading about the Hershey acquisition of Chinese firm, Golden Monkey Joint Stock Co., with its $255 million in sales; how you are lucky enough to have all of these products right there in your backyard, making them easier to research. I've never tried any of its cakes, cookies, or candies but now it's producing around 3% of revenue. I have no idea what to make of them - I can't even tell you what half of this stuff is! - but I'm going to see if there is an Asian market in Kansas City that carries any of the lines, maybe sometime this week when I run some errands.
I'm not exaggerating when I say it makes me downright giddy that my niece and nephews are now collecting cash dividend income from other kids eating orange cakes and chocolate bars on the other side of the world. I think next Christmas, I might find a way to bulk order some and gift them along with a printed copy of the 10K filing (at least for the older two).
innerscorecard
December 27, 2014
Replying to Joshua Kennon
Haha, some of these look ok and some a little revolting (Mars Cup)!
In the two employers (office jobs) I've worked at in Shanghai, these are the types of snacks the company's ayi (older female cleaner/janitor - also responsible for snacks) puts in the kitchen for everyone to come get if they like.
In case you're interested in the company's history, here's the link (may not work for you, but I think it might - the URL should be a static one that's shareable) to its online corporate filings (you can use Google or better yet Bing translate).
https://www.sgs.gov.cn/notice/notice/view?uuid=Rbd4AaREJCKQg_rPcgzdStBH5PwUvLku&tab=01
Interesting history - the actual entity Hershey's invested in was founded in 1994 but the company's predecessor was founded in Henan in the late 1970s, starting out in an old farming equipment repair shop! And now Zhao Qisan, the founder and general manager, is a National People's Congress delegate (big honor given to successful businessmen by the government) and is working with a global company founded by a Pennsylvania Mennonite! Have to love capitalism.
If you want to order these, the best way would be to use Taobao.com, which ships internationally and takes US credit cards now too. You would have to be brave and use Google Translate of course! Search term would be "金丝猴".
innerscorecard
December 27, 2014
Replying to Joshua Kennon
Looks like all posts with links need to be moderated!
Roundball
December 27, 2014
Replying to innerscorecard
Sort of related- I've been fascinated by Buffett's investment in Petrochina- making a judgement call purportedly from reading the annual report alone and swooping in with his elephant gun. "If someone weighed somewhere between 300-350 pounds, I wouldn't need precision- I would know they were fat."
Connelly Barnes
December 27, 2014
Replying to Roundball
John Huber had a good discussion of that investment on his excellent blog Base Hit Investing:
http://basehitinvesting.com/buffetts-petrochina-investment-finding-large-gaps-between-price-value/
Roundball
December 29, 2014
Replying to Connelly Barnes
Thanks! I first read about it in Snowball and then read Huber's article on it a few months ago. Huber's blog is one of my favorites
Felipe
December 28, 2014
Replying to Joshua Kennon
A late Merry Christmas from the true home of Santa.
Mind if I ask you how you get your niece and nephews interested and focused enough to actually read through a 10k. My children are still too young, but I can´t imagine many children under the age of 12 reading a 10k and actually finding it interesting (though I know exceptions exist). I would love to start teaching my own kids from a young age. Any advice is appreciated! 🙂
Roundball
December 24, 2014
Your nephew's pronunciation of TMNT is awesome. Merry Xmas!
Joshua Kennon
December 27, 2014
Replying to Roundball
Merry Christmas to you, too!
Al
December 24, 2014
Hi Joshua, Merry Christmas from Canada!
Joshua Kennon
December 27, 2014
Replying to Al
Merry Christmas from your neighbors down South!
Andrew
December 24, 2014
Did you set this up so the company dividend checks actually get sent to them? Holding a physical check quarterly might reinforce the lesson more than just seeing electronic debts on a brokerage statement.
Joshua Kennon
December 27, 2014
Replying to Andrew
I was going to but then decided against it as I'll eventually be adding other assets besides Hershey shares. I'm thinking about, instead, handing them envelopes of cash with a little receipt that shows their share of the net earnings, dividends, and retained earnings. Being handed crisp bills with the company logo on the slip should achieve the same ends (at least I'm hoping).
JB
December 24, 2014
Merry Christmas to you and your family!
Joshua Kennon
December 27, 2014
Replying to JB
Merry Christmas to you and yours! Thanks for the well wishes =)
Mike
December 24, 2014
Wonderful gift! A great company that children (and adults) can understand. I regularly buy the young loved ones blue chip shares as well for holidays and birthdays.
Have you considered getting stock certificates for them? You have a nice scripophily collection. Never too early to start others on one. Sadly, the Computershare certificate isn't anywhere as regal as the older Hershey Foods Company one.
Disclosure: Long HSY
Joshua Kennon
December 27, 2014
Replying to Mike
... I feel you. I hate those Computershare certificates.
I thought about stock certificates but since we'll be gifting a fairly diversified portfolio over time, and the industry is aggressively edging them out of existence, it was just easier to consolidate it all with our primary broker. Otherwise, I'd have loved to do it but given my long-term goals for this particular program, it wouldn't be worth the effort.
Rob
December 27, 2014
Replying to Mike
Look at OneShare.com, that is where I received some of mine
Breathaholic
December 25, 2014
Merry Xmas to you, Aaron and your families.
Joshua Kennon
December 27, 2014
Replying to Breathaholic
Right back at you and let me throw in a happy New Year =)
Paarthurnax
December 25, 2014
Merry Christmas you guys.
-Bill
Joshua Kennon
December 27, 2014
Replying to Paarthurnax
Thanks! Merry Christmas to you, too!
Paarthurnax
December 26, 2014
Where did you get those coffee cups?
Joshua Kennon
December 27, 2014
Replying to Paarthurnax
They are the 12 ounce oven-safe, microwave-safe, dishwasher-safe stoneware set from Le Creuset. The red one in this picture is part of a set that is on sale at the moment. Sur la Table has a few other colors including a rosemary, an indigo, a Soleil, and the flame.
You can also get several additional colors if you get them as part of a 16-piece dinnerware set (all of those items are also oven-safe, too). You can preview the colors here.
I like them a lot. As a matter of fact, I have one on my desk right now as I write this to you.
Paarthurnax
December 28, 2014
Replying to Joshua Kennon
Thank you for taking the time to pull up the info and reply!
I haven't been actively looking for a replacement for our coffee cups, but I've wanted to replace them, and I love the looks of those and had to know where you got them. =) Thanks again.
-Bill
innerscorecard
December 27, 2014
By the way, I was reading more about US taxes in preparation for my own 2015 filing (doing some end-of-the-year tax-loss harvesting/gain-harvesting), and I found out that children's unearned income (including dividend income) is taxed at the parent's rate, above a certain level! Obviously the intent is to avoid structuring finances so that parents give financial assets to their kids but actually spend the money (to avoid higher tax brackets), but it's something to watch out for, for sure.
Connelly Barnes
December 27, 2014
Merry Xmas and Happy New Years! Thanks for all the great writings on investments, etc.
Joshua Kennon
December 27, 2014
Replying to Connelly Barnes
And to you, too!
Engineer7006
December 27, 2014
I think Joshua should open a gift buying service (or at the very least put direct links to some of the products he finds so he can get a referral payment).
Merry Christmas to you and Aaron! Your blog has brought me much to think about over the past few years.
Basel
December 30, 2014
Josh, just want to thank you for another great year of reading this blog and for helping me become financially independent. Don't remember my username/password so I'm posting this as a guest.
Happy New Year to you and your family, as well as all the wonderful people who follow your blog.
-Basel, Houston, TX
Allen Jarboe
December 31, 2014
Merry Christmas, and a Happy New Year!