There’s the long-term investment strategy known as buy-and-hold — and then the version as practiced by billionaire Warren Buffett, which you could call buy-and-hold-and-hold. In fact, Buffett has been famously quoted as stating, “Our favorite holding period is forever.”
Coca-Cola Co. (ticker: KO) certainly hasn’t been around that long. But the Atlanta-based company founded in 1892 has formed the core of Buffett’s investment portfolio for years. Looking at its performance over the decades, it’s easy to see why.
Coke lives up to its one-time slogan as The Real Thing. As for how it has quenched Buffett’s thirst for profits, consider this: If you bought Coke stock in April 1981 (when it was worth 71 cents a share), you’d be looking at about $47 per share today, a return of 6,500 percent.
Talk about a Coke and a smile.
Money for its investors. Coca-Cola belongs to an exclusive group of companies that have earned their keep, and keep earning, as legacy stocks. When solid performance repeats itself, market base expands and rock-solid returns and dividends keep coming, it amounts to a formula just as coveted as the recipe for Coke’s syrup concentrate.
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Speaking of dividends, KO’s steady performance has earned it a reputation as a “ruler stock,” says Robert R. Johnson, president of the American College of Financial Services in the greater Philadelphia area. “Coke has had 54 consecutive years of dividend increases,” he says. “When you put a ruler on a graph of the dividends over time, the data points line up on the ruler.”
And like many of the market’s best legacy companies, Coca-Cola has diversified its product line over time. “It’s a far cry from a one-product company,” Johnson says. It offers several brands of soft drinks, fruit juices, sports drinks and other beverages. Think Minute Maid. Fuze. Glaceau. Dasani. It even owned Columbia Pictures for a spell the 1980s, reaping a huge profit when it sold out to Sony Corp. (SNE) for $1.5 billion in 1989.
Household brand names. Johnson & Johnson (JNJ) represents another company loaded with household brand names and unquestioned status as a legacy stock; like KO, it is listed on the Dow Jones industrial average and part of the Fortune Global 500. (KO is No. 10, JNJ is No. 37). The maker of Band-Aids, Tylenol and Neutrogena skin products has a record of 31 consecutive years of increases in earnings per share, says Yale Bock, a portfolio manager on Covestor and president of Y H & C Investments in Las Vegas.
“Johnson & Johnson has been an incredible company for many decades,” Bock says. It has gone 53 straight years raising its annual dividend, now at $3 per share a year. It’s something to continue to own and if you can get more at a fair price, you have to press the buy button.”
In the last year, JNJ stock has gone up almost 10 percent and now trades at $108 a share; over the last decade, it has risen more than 80 percent and over the last two decades has skyrocketed more than four fold. Extend that graph out into the next decade, and it’s as close to a cash-cow crystal ball as you’re going to get.
“With a massive balance of cash, nearly $20 billion net of debt and a business that generates nearly $20 billion in cash per year, JNJ can buy nearly any company it wants to,” Bock says.
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“JNJ is cradle to grave,” says Michael S. Beall, executive vice president of Davenport Asset Management in Richmond, Virginia. The prospect of long-term ownership in the company parallels how its products follow consumers throughout their lives: from baby powder to glucose management systems to hip replacement technology products.
“The company and our economy have seen wide swings and significant changes over the last 50 years, yet JNJ has been able to prosper,” Beall says. “Growing markets, a strong financial position — its AAA balance sheet is a rarity these days — and a proven ability to grow in multiple ways make JNJ a great buy-and-hold stock.”
Yet while JNJ, which owns Listerine and Acuvue contact lenses, has a high profile, some legacy winners fly below the radar. You may know their brands, but not the company behind them.
Other legacy stock contenders. Apparel supplier VF Corp. (VFC) got its start in 1899 and the Greensboro, North Carolina, company has since grown to be the world’s largest apparel supplier, says Steven N. Violin, senior vice president and portfolio manager at the F.L.Putnam Investment Management Co. in Wellesley, Massachusetts.
“While VF is not a household name, it represents a portfolio of well-known and high quality brands such as The North Face, Timberland and Vans,” Violin says. “Apparel is typically a cyclical business, yet VF has increased their dividend in each of the past 43 years, which includes some truly challenging economic environments.”
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Over the past 10 calendar years, VFC’s dividend has increased nearly 18 percent annually; “The stock has returned more than 19 percent annually while the Standard & Poor’s 500 index has returned 7.2 percent,” Violin says. That also beats the S&P’s consumer discretionary sector of the S&P 500, which has returned 10.8 percent annually.
And while not nearly as old, some stocks are showing strong signs of entering the legacy category. This includes Costco Wholesale Corp. (COST), a stock that has climbed a very steady ladder over the last 20 years. Since April 1996, Costco stock has soared from $9 to $157 per share.
“It hasn’t been around 100 years, but I think it will be around for at least 100 more,” says Dan Neiman, partner at Neiman Funds Management in San Diego. “Costco started paying dividends in 2004 and has seen an average annual growth of 20 percent over that time frame. There’s even been a few special dividends over the years that have increased return considerably.”
Still, a long-standing company does not a legacy stock make — especially when marketplace forces eat away at its dominance or change its dynamics. A good example is AT&T (T). Founded in 2005 when “Baby Bell” SBC Communications purchased its former parent company, AT&T traces its roots to the telephone’s creator, Alexander Graham Bell, in 1885.
Yet since the acquisition, the track record has been mixed. T stock is up two-thirds since April 2005, but off almost 8 percent since the end of the third quarter of 2007. Confusion and jitters arose among investors when the stock was delisted from the Dow in March of 2015 after 99 years (including the history of the former AT&T Corp.).
“This may in part be explained by the fact that removal from the Dow is usually an indication of company problems,” says Angelo DeCandia, professor of business and accounting at Touro College in New York.
“But for those companies that work through their problems there is plenty of upside potential — and some companies have done better after having left the Dow,” DeCandia says. “Hewlett Packard Co. (HPQ) and Citigroup (C) are both up more than 60 percent since their departure.”
And while the phrase “legacy stock” refers to an investment’s staying power, it can definitely create a legacy of a different sort. Hold forever? Maybe not such a bad idea, Mr. Buffett.
Bock puts it like this: “Legacy investments are the kinds of companies that can make a family, and even a generation of that same group, wealthy.”
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Why It’s OK to Love Legacy Investments originally appeared on usnews.com
