Wednesday, April 15, 2009

GM vs Philip Morris (Altria)

The following is a good example of how much durable high return on capital (ROC) and a consistently low stock price in the long run matters in investing. Let's say $ 10,000 was invested in the following two stocks back in 1957.

Fifty plus years later, $ 10,000 invested in General Motors (GM) back then was well on its way to being worth nothing.

(Unless, of course, the cash dividends were invested elsewhere over time.)

In contrast, $ 10,000 invested in Philip Morris (now Altria: MO) was worth over $ 80 million (incl. reinvested dividends) fifty years later.

The tobacco company generated an annual return of nearly 20% during that time frame.

So an asset that returns that much annually left to the magic of compounding turns $ 10,000 into more than $ 80 million in roughly 50 years.

A big part of the returns produced by Philip Morris/Altria came from dividends that were reinvested in a stock that was consistently inexpensive.*


The fact that some investors won't touch a tobacco stock along with the risk of litigation, regulation, taxation, and declining volumes kept shares of Philip Morris/Altria mostly cheap for many years.

That means a roughly 6x increase in value has been an average decade for MO. That also happens to be pretty much what Altria produced this past decade. Odds aren't too bad that both Altria and the recently spun off Philip Morris International (PM) will continue to do just fine (though likely not nearly as spectacular as in the past).


Also, all else equal, total return will be improved if the shares are priced, more often than not, at a nice discount to intrinsic value (to improve the effectiveness of buybacks and dividend reinvestment).

Those with a long-term investing horizon should consider that the next time they cheer for a near-term stock price increase.

Adam


Long position in MO and PM

* This works in a similar way to share repurchases other than tax considerations. Dividends can be taxed. That is not the case for share repurchases. Excluding the tax differences, share repurchases and dividend reinvestments -- implemented at reasonable or better valuation levels (i.e. discount to intrinsic value) -- similarly benefit long-term owners; the former reduces overall share count, while the latter increases the number of shares owned.
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