My Favorite Companies from the Past
Two Stocks for the Future
Recently my Mom passed away (she was 95), and of course I was sad. One of the many thoughts that came to mind was how different everything was when she was born in 1914 and while she was growing up in the Roaring Twenties and the Great Depression.
Not every home had electricity or running water. The wood stove was used by most Americans, as was the ice box, which was eventually replaced by the refrigerator. Houses came with parlors, pantries and cellars used for the cold storage of winter vegetables.
Following World War I, the American economy went into a deep recession with 20% unemployment and high inflation. But soon new government economic policies, new inventions and increased consumer spending led to a booming U.S. economy that accelerated as the decade wore on. Presidents Harding and Coolidge were instrumental in pushing the economy forward.
The automobile became commonplace and led to new road construction, motels and gas stations. Henry Ford became the clear winner with his Model T and efficient factories. Nearly 180 other auto makers sprung up during the 1920s, as new entrepreneurs flocked to make their fortune in the new technology of the automobile and other inventions of the day.
New radio stations began to play recordings by such greats as Louis Armstrong and Duke Ellington. New dance halls produced many new dances including the Charleston and Lindy Hop.
Women fought for equal rights and gained greater respect in the workplace. Women began entering colleges and universities. They threw away their Victorian attire and switched to the Flapper style with slinky knee-length dresses.
Investors took note of the booming economy and sent the stock market to new heights. Rampant speculation gave an illusion that the new bull market would last forever. Sound familiar? On October 29, 1929, the stock market crashed and the Great Depression followed.
The 1930s started off badly, and the economy worsened and spread worldwide. The stock market continued to plummet, and unemployment reached 25%. Farming was a major industry back then, and suffered severely as prices for farm crops fell 60% and droughts parched the Great Plains. Other prices dropped, too, leading to a deflationary spiral and low interest rates. Bank account withdrawals and loan defaults led to the failure of 9,000 banks. Wow! Many Americans lost all of their money.
Recovery from the depression started in 1933 but was so slow that unemployment was still 15% in 1940. Government spending on World War II accelerated the recovery from the Great Depression.
Many inventions were created during the 1930s; including Scotch tape, the RCA phonograph and Kodak's Kodachrome. The airplane became a new mode of transportation. Radio became the dominant mass medium. The Empire State Building was completed in 1931. And President Franklin Delano Roosevelt initiated the New Deal with many government construction and conservation programs to jump-start the sputtering economy.
F. Scott Fitzgerald, Ernest Hemingway, John Steinbeck and others penned great literary works. The new Golden Age of Hollywood brought many classic movies such as "Gone with the Wind," "The Wizard of Oz" and "King Kong." Leading Hollywood actors and actresses became household names including Laurel and Hardy, Judy Garland, Clark Gable, Vivian Leigh and Humphrey Bogart.
Sports became more popular with baseball becoming America's game. My Mom's all-time favorite: Ted Williams; along with Babe Ruth, Dizzy Dean, Joe DiMaggio, Leo Durocher, Jimmie Foxx, Lou Gehrig and Mel Ott attracted millions of new fans.
Later in history, the generation that endured the Great Depression became known as the Greatest Generation. They learned many hard lessons during the Depression and World War II that built character and humility.
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Many companies became extinct during the 1930s, but the companies that survived helped to build the U.S. into the greatest industrial nation to date. I'm kind of a history buff, and I truly enjoy reading about the origins of companies and how they evolved. In addition to annual reports, Wikipedia usually provides an interesting history of old companies.
It is surprising how many of our current U.S. companies were founded more than 150 years ago. One of the oldest is Bank of NY, founded in 1792. CIGNA, JP Morgan, DuPont, Colgate Palmolive, Hartford Financial, Procter & Gamble, Tiffany, Pfizer, Aetna, and American Express are a few of the companies that continue to prosper.
I get great satisfaction investing in big-name well-respected companies. If you buy when a company's stock declines to a reasonable price and then hold your stock until it becomes clearly overvalued, you can enjoy steady gains with minimal risk. And the good companies pay generous dividends that usually rise every year.
Today, I especially like PepsiCo and Procter & Gamble.
PepsiCo didn't arrive on the scene until 1898, which makes it a "newcomer," but the company has prospered for 111 years and has survived a recession or two. Both Pepsi and P&G are run by astute management teams that perpetuate the great successes of the past and innovate and expand to ensure that their companies will be around for many more years.
PepsiCo (PEP), incorporated in 1919, is a global leader in the soft drink and snack food industries. PepsiCo's popular brands include Pepsi, Frito-Lay, Gatorade, and Quaker Foods (acquired in 2001). PEP derives 65% of total sales from North America, while 35% comes from the rest of the world. The company is beating its competition by expanding in international markets and focusing on health and wellness beverages and foods.
Pepsi management has created faster growth by reacting more quickly to new growth trends in the industry. Bottled water (Aquafina), fruit juices (Tropicana and Naked Juice), and nutritious snacks (Quaker oatmeal and granola bars) are growing noticeably faster than traditional carbonated soft drinks and conventional snack foods.
Indra Nooyi has been the chief executive of PepsiCo since 2006. Her focus has been on healthier snacks with net-zero impact on the environment. Ms. Nooyi calls her philosophy: "Performance With Purpose."
Sales decreased 2% and earnings per share improved by 5% during the first nine months of 2009 compared to a year ago. Sales and earnings per share will likely increase by 15% during the next 12-month period. PEP's dividend yield is attractive at 2.9%, and the dividend has been raised every year for 37 years.
Pepsi is a bargain at 15.9 times next 12-month EPS. The company is top-notch and operates in a stable industry. I expect PEP to outperform the stock market during the next several years as the company rolls out new products, acquires companies with good growth potential, and gains market share overseas.
Procter & Gamble (PG) was founded in 1827 by William Procter and James Gamble as a soap and candle company. Management is committed to providing products and services of superior quality and value. The company has become the leading consumer goods company in the U.S. and now makes and sells a wide variety of household products and personal care items. Leading brands include: Head & Shoulders, Olay, Dawn, Tide, Bounty, Charmin, Pampers, Iams, Pringles, Braun, Duracell and Gillette. That's a heck of a line-up of diversified products.
P&G has created a long history of consistent revenue and earnings growth. The company's acquisition of Gillette in 2005 has produced modest sales and earnings growth to date, but an aggressive restructuring program is aimed at cutting costs, improving profit margins, and focusing on faster-growing products. Great profit opportunities exist at Gillette. I'm confident P&G will unleash these opportunities during the next few years.
P&G sells 60% of its goods outside the U.S. The company is expanding its international operations further by focusing on rapidly growing overseas markets. Sales and earnings were down slightly during the latest 12-month period, but I expect EPS growth of 10% during the next 12 months. PG shares sell at a modest 14.5 times EPS with a dividend yield of 2.8%. The current low price offers an excellent opportunity to buy a premier company that's been around for 182 years and counting.
J. Royden Ward
For Cabot Wealth Advisory
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