It seems to me that we tend to overuse the word contrarian in our business. It makes its users appear smart because they can position themselves to be apart from the crowd. Fair enough. But let me propose something more accurate – counterintuitive.
Over the last twenty or thirty years, even the most casual observer of economic events… Read more at Seeking Alpha
Let’s continue with the theme of the previous posts where we discussed the impact of re-investing a growing dividend over the long-run. Recall that we found not only above average
returns in consumer staples and health care, but we also found low volatility. For this article I’d like to take a closer look at the financials and show that we have some of the same total return
characteristics as staples and health care. Despite higher volatility in the financials, long-run total returns in this sector make a compelling case… Read more at Seeking Alpha
Let’s continue where we left off in the last article and consider another low beta group – health care. Over the last decade health care and pharma have seen success mostly in the rear view mirror. Blockbusters like Lipitor or Viagra are finding themselves at or near the end of their patent cycles and replacements… Read more at Seeking Alpha
In the spirit of the election season it might be appropriate to consider a ‘longrun’ perspective on some of the public policies shaping the current contest.
Before supply-side economics even had a name, and before FDR (or even Hitler for that matter) embraced Keynes, we can find in none other than the young Soviet Union an economic framework whose spirit echoes to this day.
Lenin’s new ‘republic’ had just come out of a trifecta of misery and chaos – war, revolution, and civil war. Further, the Bolshevik policy of War Communism produced an economic collapse by replacing private incentives (especially in agriculture) with rigid central planning. Discontent, hunger, and another revolution loomed.
So, what’s a self-respecting Bolshevik to do? Why, implement capitalism of course! Even though it was limited in scope, this is exactly what Lenin’s New Economic Policy (NEP) accomplished. A 1921 decree replaced the old policy of requisitioning all agricultural output with a new program where the government took only a portion of a farmer’s output. Food production subsequently soared by 40 per-cent in the season after the decree. Additional reforms, such as legalizing enterprises with less than 20 employees, also boosted urban employment and growth.
If supply-side economics is about anything, it’s about the incentives that human beings respond to – especially tax and regulatory incentives. It’s obvious what the aims of the NEP were: tax cuts and deregulation!
If Lenin himself could recognize the power of economic incentives, then why can’t the policy makers of today do likewise? After four years of a flat or falling economy, President Obama seeks to raise taxes and implement more regulations. After four years of austerity and rioting in Europe, policy makers there show little inclination to embrace an incentives based economic policy. Why not? Can it really be that hard for today’s left to embrace Leninism – tax cuts and all?
Now back to more important business. The table below shows the performance of the Longrundata Model Portfolio up to quarter end at September 28, 2012. Top performers in the quarter included Illinois Tool Works (ITW) delivering 14.9% over the three month period; Procter & Gamble (PG) returning a surprising 14.3%; JP Morgan (JPM) at 12.5%; and General Electric (GE) at 11.7%.
Other notable standouts included Pfizer (PFE) delivering 9% over 90 days; Novartis with 9.1%; Merck (MRK) with 8.7%; and Abbott Labs (ABT) with 6.9%. In a future column I’ll be taking a closer look at health care stocks as a low-beta strategy that delivers exceptional long-run returns.
| Symbol | Dividend | Yield | 3 Mo. | 1 Yr. | 3 Yr. | 5 Yr. | 10 Yr. | 25 Yr. | Beta |
|---|---|---|---|---|---|---|---|---|---|
| CL | 2.48 | 2.30% | 3.90% | 24.50% | 15.60% | 11.30% | 9.30% | 16.00% | 0.34 |
| KMB | 2.96 | 3.40% | 3.10% | 26.10% | 18.50% | 8.30% | 7.80% | 12.30% | 0.09 |
| KO | 1.02 | 2.70% | -3.20% | 19.20% | 15.90% | 8.70% | 7.00% | 12.70% | 0.41 |
| PG | 2.25 | 3.20% | 14.30% | 14.00% | 10.40% | 2.50% | 6.80% | 12.60% | 0.27 |
| PM | 3.40 | 3.70% | 1.90% | 51.10% | 28.30% | N/A | N/A | N/A | 0.87 |
| ABT | 2.04 | 3.00% | 6.90% | 41.40% | 16.00% | 7.80% | 8.70% | 12.10% | 0.44 |
| JNJ | 2.44 | 3.50% | 2.20% | 15.10% | 8.60% | 4.20% | 4.80% | 12.50% | 0.49 |
| MRK | 1.68 | 3.70% | 8.70% | 49.10% | 18.10% | 1.40% | 4.40% | 9.00% | 0.40 |
| NVS | 2.48 | 4.00% | 9.10% | 17.00% | 11.80% | 6.10% | 7.10% | N/A | 0.48 |
| PFE | 0.88 | 3.50% | 9.00% | 49.10% | 19.80% | 4.90% | 1.80% | 12.90% | 0.66 |
| GE | 0.68 | 3.00% | 11.70% | 60.00% | 16.00% | -8.20% | 1.90% | 9.00% | 1.43 |
| ITW | 1.52 | 2.60% | 14.90% | 52.10% | 15.80% | 3.10% | 9.20% | N/A | 1.27 |
| MMM | 2.36 | 2.50% | 4.10% | 33.80% | 11.20% | 2.2% | 7.30% | 9.20% | 1.02 |
| UTX | 2.14 | 2.70% | 5.00% | 15.70% | 11.90% | 1.40% | 12.40% | 12.50% | 1.15 |
| XOM | 2.28 | 2.50% | 7.8% | 31.70% | 13.60% | 1.70% | 12.90% | 11.70% | 0.83 |
| BAC | 0.04 | 0.40% | 9.80% | 60.50% | -18.00% | -27.90% | -9.50% | 4.90% | 1.86 |
| C | 0.04 | 0.10% | 19.10% | 41.70% | -10.20% | -40.60% | -18.40% | 1.60% | 1.91 |
| JPM | 1.20 | 2.90% | 12.50% | 45.70% | 0.90% | -0.70% | 10.70% | 8.80% | 1.64 |
| USB | 0.78 | 2.30% | 6.30% | 54.90% | 19.50% | 3.10% | 9.40% | N/A | 0.83 |
| WFC | 0.88 | 2.50% | 3.60% | 52.20% | 10.60% | 1.10% | 6.30% | 15.40% | 1.13 |
| S&P 500 SPDR | N/A | 1.91% | 6.00% | 33.70% | 13.90% | 0.60% | 7.30% | 9.32% * | N/A |
| Staples SPDR | N/A | 2.59% | 3.10% | 26.00% | 15.40% | 7.70% | 8.00% | N/A | N/A |
| Health Care SPDR | N/A | 1.93% | 5.70% | 33.30% | 14.50% | 4.10% | 5.90% | N/A | N/A |
| Industrial SPDR | N/A | 2.03% | 3.90% | 31.50% | 14.70% | -0.60% | 7.80% | N/A | N/A |
| Financial SPDR | N/A | 1.64% | 6.20% | 40.80% | 4.30% | -13.10% | -1.10% | N/A | N/A |
Disclosure: The author is a direct owner of the companies mentioned here.
The author is not an owner of SPDR’s mentioned here.
Three month returns are 90 days, not annualized.
‘Yield’ and ‘Recent’ data may not reflect end of quarter date.
*S & P 500 Index (not SPDR) from January 1987 to December 2011 with dividends re-invested.
For a powerful insight into the value of a growing dividend and its impact on total returns, you don’t have to look much further than some of the premier consumer companies we have all known and loved for a long time. While this isn’t necessarily news to most investors, I think that in today’s context of low Treasury yields and flat economic growth, consumer staples offer some old and new rewards that investors can’t ignore.
Let’s begin with the ‘old.’ Peter Lynch once famously said that he got some of his best investing ideas while shopping with his wife – his noted “invest what you know” philosophy. As almost 25 years have passed since the publication of One Up On Wall Street, we now have some total return numbers that any wife would be proud of.
Take a look at just four companies and their respective total returns going back 25 years, with dividends re-invested up to the quarter ending June 29, 2012. Here we have consumer stalwarts like Colgate-Palmolive (CL) 16.2%, Coca-Cola (KO) 13.4%, Kimberly-Clark (KMB) 12.7%, and even much maligned Procter & Gamble (PG) 12.3% showing us what successful long term investing is all about.
In Colgate alone, a $1,000 investment 25 years ago is worth over $43,000 today. A thousand dollars invested in Coke is worth over $23,000 and the amounts for Kimberly and P&G are, respectively, over $20,000 and over $18,000. Not bad for selling toothpaste, toilet paper, and Steve Jobs’ infamous “sugared water” (or at least Coke’s version of it).
But our story gets better. Not only are these companies producing stellar returns, they’re doing it with dramatically reduced risk or volatility. Corresponding betas are as follows: Colgate at 0.34, Coke at 0.43, Kimberly at a paltry 0.16, and P&G at 0.32. With an average beta of 0.31 for our favorite four, I propose a name change for consumer staples stocks – we should start calling them consumer ‘stables’!
Now consider the total return for the S&P 500 over the last 25 years – 9.3%. When stacked next to our favorite four (13.6% over 25 years) we’re not just ‘seeking alpha,’ we’re actually living it by getting over 13% in total returns while reducing our risk by more than two thirds!
I know, anyone can cherry-pick winners after the fact. But it just can’t be ignored that a growing and re-invested dividend, especially over the long run, produces some spectacular results.
| Symbol | Dividend | Yield | 3 Mo. | 1 Yr. | 3 Yr. | 5 Yr. | 10 Yr. | 25 Yr. | Beta |
|---|---|---|---|---|---|---|---|---|---|
| CL | 2.48 | 2.40% | 6.42% | 20.79% | 15.93% | 12.56% | 9.61% | 16.23% | 0.34 |
| KMB | 2.96 | 3.50% | 13.40% | 30.39% | 20.79% | 8.64% | 6.65% | 12.76% | 0.16 |
| KO | 2.04 | 2.60% | 6.17% | 18.17% | 20.24% | 11.53% | 6.12% | 13.45% | 0.43 |
| PG | 2.25 | 3.70% | -8.56% | -1.55% | 8.98% | 2.75% | 5.65% | 12.31% | 0.32 |
| PM | 3.08 | 3.50% | -1.49% | 36.16% | 31.09% | N/A | N/A | N/A | 0.87 |
| ABT | 2.04 | 3.20% | 6.17% | 25.85% | 15.34% | 6.82% | 9.36% | 11.68% | 0.39 |
| JNJ | 2.44 | 3.60% | 3.03% | 4.14% | 9.56% | 5.16% | 5.69% | 12.76% | 0.51 |
| MRK | 1.68 | 4.00% | 9.60% | 22.83% | 19.37% | 1.00% | 3.13% | 9.44% | 0.43 |
| NVS | 2.48 | 4.40% | 0.71% | -4.51% | 15.23% | 3.81% | 5.43% | N/A | 0.56 |
| PFE | 0.88 | 3.80% | 2.81% | 15.57% | 20.38% | 2.64% | -.10% | 11.59% | 0.66 |
| GE | 0.68 | 3.30% | 4.98% | 12.62% | 24.71% | -7.89% | 0.21% | 9.29% | 1.49 |
| ITW | 1.44 | 2.80% | -6.83% | -5.52% | 15.28% | 1.77% | 6.85% | N/A | 1.25 |
| MMM | 2.36 | 2.60% | 1.10% | -4.75% | 16.87% | 3.15% | 5.99% | 9.88% | 1.10 |
| UTX | 2.14 | 2.90% | -8.12% | -14.14% | 15.79% | 3.22% | 10.73% | 12.80% | 1.13 |
| XOM | 2.28 | 2.70% | -1.04% | 6.98% | 9.32% | 2.46% | 10.18% | 11.83% | 0.76 |
| BAC | 0.04 | 0.50% | -15.41% | -25.90% | -14.11% | -28.50% | -10.59% | 4.44% | 1.87 |
| C | 0.04 | 0.10% | -25.63% | -36.08% | -2.61% | -43.51% | -20.70% | 1.43% | 1.98 |
| JPM | 1.20 | 3.30% | -22.03% | -12.16% | 3.32% | -4.13% | 4.43% | 7.97% | 1.66 |
| USB | 0.78 | 2.40% | 2.06% | 26.25% | 24.17% | 2.04% | 7.17% | N/A | 0.89 |
| WFC | 0.88 | 2.60% | -2.47% | 19.02% | 12.84% | 1.13% | 5.90% | 15.76% | 1.10 |
| Averages | 2.89% | -1.76% | 6.71% | 14.12% | -0.81% | 3.77% | 10.85% | 0.90 | |
| S&P 500 SPDR | N/A | 2.01% | -3.55% | 3.80% | 15.96% | -0.14% | 5.43% | 9.32% * | N/A |
| Staples SPDR | N/A | 2.67% | 1.91% | 13.70% | 17.27% | 7.56% | 6.70% | N/A | N/A |
| Health Care SPDR | N/A | 2.00% | 1.25% | 8.01% | 15.09% | 3.17% | 5.23% | N/A | N/A |
| Industrial SPDR | N/A | 2.16% | -4.82% | -3.86% | 19.70% | 0.02% | 6.10% | N/A | N/A |
| Financial SPDR | N/A | 1.67% | -7.57% | -4.64% | 8.64% | -14.82% | -3.01% | N/A | N/A |
Disclosure: The author is a direct owner of the companies mentioned here.
The author is not an owner of SPDR’s mentioned here.
Three month returns are 90 days, not annualized.
‘Yield’ and ‘Recent’ data may not reflect end of quarter date.
*S & P 500 Index (not SPDR) from January 1987 to December 2011 with dividends re-invested.
It’s time to have a look at how the last three months have treated the Model Portfolio (Top Twenty). I’ve also included each company’s corresponding beta as well as that of the portfolio as a whole. As much as I believe in the limitations of beta (insofar as the definition of risk can’t be limited to mere volatility), it at least provides ‘some’ objective comparison to market risks.
This is a debate that could go on forever. In an attempt to seek closure, allow me to quote from the master. In his most recent letter to shareholders (2011 annual report page 17), Warren Buffet illustrates what I’ll call the ‘opportunity cost’ of risk. Specifically, the risk of not owning common stocks when stacked against inflation and taxes. Take heed gold bugs, mattress stuffers, passbook savings worshippers and other ne’er do wells!
Using our trusted longrundata calculator we can easily find:
| Symbol | 3 Months (%) | 12 Months (%) | Beta |
|---|---|---|---|
| CL | 6.50% | 24.70% | 0.33 |
| KMB | 1.40% | 17.80% | 0.24 |
| KO | 6.50% | 13.30% | 0.40 |
| PG | 1.50% | 11.80% | 0.35 |
| PM | 13.90% | 42.20% | 0.84 |
| ABT | 9.90% | 28.80% | 0.25 |
| JNJ | 1.40% | 14.90% | 0.43 |
| MRK | 3.00% | 21.60% | 0.30 |
| NVS | 1.20% | 6.74% | 0.47 |
| PFE | 5.70% | 15.840% | 0.61 |
| GE | 13.00% | 2.30% | 1.67 |
| ITW | 23.00% | 8.51% | 1.23 |
| MMM | 9.80% | -1.65% | 1.13 |
| UTX | 14.20% | -0.45% | 1.16 |
| XOM | 2.80% | 4.89% | 0.61 |
| BAC | 72.40% | -28.11% | 2.07 |
| C | 38.90% | -17.82% | 2.04 |
| JPM | 39.20% | 1.97% | 1.66 |
| USB | 17.80% | 21.35% | 1.08 |
| WFC | 24.30% | 8.40% | 1.54 |
| Averages | 14.90% | 9.85% | 0.92 |
Disclosure: The author is a direct owner of the companies mentioned here.
While precious metals and portfolio theory make for easy targets, now comes the hard part – time to eat our own cooking. Just like any other self respecting financial website, we’ll take this opportunity to offer a ‘model portfolio’. So…voila!
| Company | Ticker | Recent | Dividend($) | Yield(%) | 25 Year Total Return |
|---|---|---|---|---|---|
| Colgate Polmolive | CL | 91 | 2.32 | 2.7 | 16.7 |
| Kimberly Clark | KMB | 72 | 2.80 | 4.20 | 13.5 |
| Coca Cola | KO | 67 | 1.88 | 2.70 | 13.60 |
| Proctor & Gamble | PG | 65 | 2.10 | 3.40 | 13.90 |
| Phillip Morris | PM | 66 | 2.56 | 3.70 | N/A |
| Abbot Labs | ABT | 52 | 1.92 | 3.80 | 12.20 |
| Johnson & Johnson | JNJ | 64 | 2.28 | 3.50 | 13.90 |
| Merck | MRK | 32 | 1.52 | 4.70 | 10.50 |
| Novartis (ADS) | NVS | 58 | 2.00 | 3.50 | N/A |
| Pfizer | PFE | 19 | 0.80 | 4.30 | 11.60 |
| General Electric | GE | 16 | 0.60 | 3.70 | 9.80 |
| Illinois Tool Works | ITW | 46 | 1.44 | 3.30 | 13.20 |
| 3M | MMM | 79 | 2.20 | 2.70 | 10.50 |
| United Technologies | UTX | 74 | 1.92 | 2.70 | 13.70 |
| Exxon Mobile | XOM | 77 | 1.88 | 2.50 | 12.80 |
| Bank Of America | BAC | 6 | 0.04 | 0.50 | 3.90 |
| Citigroup | C | 29 | 0.04 | 0.10 | 1.40 |
| JP Morgan | JPM | 33 | 1.00 | 2.70 | 10.50 |
| US Bancorp | USB | 25 | 0.50 | 2.20 | 10.50 |
| Wells Fargo | WFC | 27 | 0.48 | 1.90 | 15.60 |
Note: 25 year total return for entire portfolio is 11.38%
Only four of Standard and Poor’s ten sectors are represented (with the exception XOM). The preference is to stay away from the cyclical nature of discretionary and materials stocks and the potential negative impacts on dividends. Utilities and telecoms can’t offer substantial dividend growth rates. IT offers too few dividend opportunities (one among many shareholder issues) and energy can have a profile that too closely resembles materials.
This leaves staples, health care, industrials and financials. Generally speaking, the stable cash flows that are historically associated with these sectors offer better ‘longrun’ dividend opportunities. Clearly, a strong case can be made against financials and some will take exception to dividend prospects among industrials. But again, the focus after all is the ‘longrun’ – looking both backward and forward. More to come…
Disclosure: The author is a direct owner of each company mentioned here.
H. Malovich,
October 12, 2011
If beta is giving us fits, headaches, and lighter wallets, then what about the rest of the Modern Portfolio Theory albatross? David Dreman is one of my favorite money managers and commentators. Earlier this year he penned an outstanding MPT critique in his Forbes column where he outlined some of the risks that beta doesn’t quantify, like leverage or dividends.
I’ve always believed that there is a subtle distinction that finance scholars can’t make: efficient markets are not perfect markets. And I believe that the failure to make this distinction has led investment scholarship to places it shouldn’t necessarily go. We’ve created an altar, even a utopia out of MPT and it’s become difficult to claim that the emperor has no clothes.
How did we get here?
The trouble with our civilization, not to mention the small corner that financial theory occupies, is that we humans believe that we can quantify the past in order to make accurate predictions about the future. And no doubt there are a great many things we can quantify and a great many things we can predict with reasonable degrees of accuracy. Thank you Issac Newton!
Ah, but alas, as amazing as our predictive powers can be, they can also find themselves swimming in the swamp our egos, our greed, and our hubris. Thank you William Shakespeare!
This dual dilemma, sort of like an imaginary Shakespeare vs. Newton UFC bout, seems lost on the practitioners of MPT. They apparently know everything. For us mere mortals they have served up ‘CAPM’ and ‘beta’ and the ‘efficient markets hypothesis’ and all manner of other ghastly horrors – few if any leading to even modest enrichment.
Fortunately, recent research is beginning to show the shortcomings of MPT. Despite the Nobel Prizes awarded, all we’re really being served is a cup of empty tea.
H. Malovich,
September 12, 2011
Next time:
And The Winners Are…
Risk is a four-letter word. So is beta. So are a few others. But what if more risk doesn’t necessarily mean more reward.
Beta, as a measure of volatility for a given stock against the overall market, tells us that we must increase our investment risks if we are to reap increased returns. Eric Falkenstein, author of Finding Alpha, seems to think otherwise.
In a study tracking total return versus beta from 1962 to 2010, Mr. Falkenstein found that lower beta stocks with less risk outperformed outperformed riskier stocks with higher betas. Norm Rothery of www.stingyinvestor.com provides the following graphic:
Mr. Falkenstein’s results are both counter-intuitive and striking: investors taking on less risk substantially outperformed those taking on more risk. Moreover, low beta portfolios seem to outperform the market as a whole. At the risk of talking our own books, we here at longrundata would like to postulate that the difference is dividends and dividend growth rates (longrun ones, of course). More to come…
H. Malovich,
August 29, 2011
Next Time:
MPT or Empty Tea?
And the Winners Are…
Where’s Judas when you really need him? History’s most famous snitch and his thirty pieces of silver might have come in handy in today’s silver market.
While JP Morgan denies it, the blogosphere is alight with various and vicious rumours about JPM’s ability to actually come up with the silver needed to back the SLV fund (of which JPM is custodian).
An outlandish theory served up by pyjama wearing paranoids? Perhaps. But recent storage data from the Comex’s warehouses suggest that there isn’t enough silver on hand for that lowly precious (or is that precocious?) metal to match the existing commitments that the SLV ETF has on silver supply.
What are we to make of this?
The pyjama crowd seems to think that this represents a buying opportunity as JPM begins to scramble to find the silver it needs to make the ETF whole. That might be one convenient theory that fits nicely with a macro view of rising precious (again, precocious) metals prices and impending world doom.
But, what about another, less forgiving view? Morgan, as the un-encouraging fine print in its SLV custodial agreement reads, is really under no firm obligation to actually provide the silver it has promised to the holders of its ETF.
The SLV, like many other ETF’s, relies on over traded and under warehoused futures to determine its value. Fund custodians like JPM, along with their 800 dollar an hour lawyers, like to use words like “best efforts” or “market availability” when they design their products and offer them to the public.
The silver bulls seem to think that this means JPM is on the hook for something large.
Really? Maybe in the sense that Lehman was on the hook for the mortgage paper it underwrote, but surely today the public knows better – right?
In a time of turmoil, we would be more likely to see JPM abandon its “soft commitments” rather than actually see SLV holders get their silver. Sort of like the bondholders of General Motors.
And when SLV holders finally come to this conclusion, as all rational (meaning poorer) investors inevitably do, it is far more likely that they will leave the market quickly before they bid it up precipitously.
So, whatever happened to Judas anyway? Oh, that’s right, he hanged himself. Maybe the weight of those thirty pieces helped!
Next time:
Is There Really a Beta Way?
MPT or Empty Tea?
longrundata.com 2013 Contact Us
About Us
longrundata.com is currently in Beta mode Template by Rambling Soul
