Altria Outperforms...Again

Bespoke Investment Group recently highlighted Altria's (MO) outperformance (historic and recent) vs the S&P 500.

Stocks like Altria, Coca-Cola, and Pepsi among others over the long run tend to outperform the S&P 500. That makes them both good on offense and defense though they are often treated as being just good for the latter.

To demonstrate this, a worthwhile exercise is trying to find a consumer staple stock that has not outperformed the S&P 500 over any 20-year period (usually an easy thing to check these days on a number of financial sites). There are exceptions -- usually caused by excessive valuation at the beginning of a 20-year period -- but otherwise it's actually very difficult to find one that has underperformed. Even the mediocre consumer staple businesses tend to at least hold their own in the long run against the S&P 500.
(Over the shorter run -- less than five years or so -- anything can happen as far as relative performance goes, of course.)

From Bespoke Investment Group's post on Altria:

...MO's historical yearly performance versus the S&P 500 shows just how much of a powerhouse the stock is. Since 1981, MO has averaged a yearly gain (not including dividends) of 18.54%, while the S&P 500 has averaged a gain of 8.77%. In the 23 years that the S&P 500 has been up for the year, MO has outperformed the index 20 times. In the 9 years that the S&P 500 has been down, MO has outperformed the index all 9 times.

The article points out that Altria outperformance excludes dividends. Keep in mind that Altria has consistently had one of the largest dividends among S&P 500 stocks (Altria has routinely had a 5-8% per year dividend on top of that 18.54% annualized return). So while there are some great money managers, it's worth remembering that the simple act of buying and holding a company like Altria would have done rather well by any measure.

That's the past. The spectacular returns above seem unlikely going forward. The question is whether, in the long run, a stock like Altria will continue at least outperforming the S&P 500?

The great brand franchises (smoking may not everyone's favorite for obvious reasons but beverages and candy work just fine) with some scale are compounding machines. In my view this remains an underutilized strategy especially if the investor judges value well and always buys at a discount.

Compounding is not difficult to understand yet just how powerful it is seems to get underestimated or, at least, underutilized. It's not always intuitive. Bill Gates has said: "Compound interest, even when explained, seems like a trick." Yet it works. Knowing this, still huge amounts of energy (more than ever, it seems) is expended on trades made over extremely short time horizons where the power of compounding cannot possibly be a factor. So there's this extremely powerful force, that works great passively over time if you buy good assets, yet collectively market participants are trading more than ever. Basically, trusting the power of compounding less than ever. The question is why?

I suspect whatever causes the above disconnect to occur is related to the reason why the consistent long-term outperformance of the great branded franchises is still underutilized as a core investing strategy. I also suspect it's related to the reason why consumer staples are still routinely referred to as defensive stocks with all evidence pointing to them being both a good offense and defense. Having said that, I do think the long-term outperformance naturally beg questions like:

"How can something that straightforward not be figured out by now?"


"That's in past, how can that kind of growth in value continue?"

Well, consider what was said in 1938 about Coca-Cola.

Some think if an investment idea is well-known and seems obvious it can't be really good. In 1938, Fortune Magazine concluded "Several times every year, a weighty and serious investor looks long and with profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late." Since that time, Coca-Cola has grown significantly both domestically and around the world. It was not too late in 1938, and we believe it is far from that today. - From the Yacktman Fund 1Q 2010 Letter

Also, along the same lines remember what Buffett had to say about Coca-Cola when he finally bought it in the late 1980s.

Owning some of the great franchises continues to makes sense for my money but they still have to be bought at a nice discount to intrinsic business value. What's sensible to buy at a discount to intrinsic value doesn't make sense at some materially higher valuation.*

Otherwise, these can be good offense and defense.

What ultimately matters, of course, is how a business and its shares will perform going forward. Getting that at least mostly right still requires plenty of work.

In other words, just because a particular business (or type of business) has done well in the past guarantees nothing.


Related posts:
Grantham on Quality Stocks Revisited - July 2010
Friends & Romans - May 2010
Grantham on Quality Stocks - November 2009
Best Performing Mutual Funds - 20 Years - May 2009
Staples vs Cyclicals - April 2009
Best and Worst Performing DJIA Stock - April 2009
Defensive Stocks? - April 2009

* Altria, and any tobacco business, has a unique set of risks versus other consumer staples business. With any investment, no matter how seemingly attractive the core economics may be, margin of safety is all-important. The margin of safety required always comes down to the specific risks of each business. This protects against the unforeseen real, even if fixable, serious business problems. Still, it's worth considering this: "If the business earns 6% o­n capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% o­n capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." Charlie Munger at USC Business School in 1994
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice.
Share on :
Altria Outperforms...Again
Altria Outperforms...Again
Reviewed by jembe
Published :
Rating : 4.5