From Porter Stansberry, Editor, Stansberry’s Investment Advisory:
It’s time to revisit – and re-recommend – an “old faithful.”
This stock should be a mainstay in your portfolio. It will provide ballast and stability when the market gets choppy. And given a recent decline in the share price, this stock should do well from here even if a market correction takes longer to show up than we expect.
Plus, it’s a perfect example of how capital efficiency produces excellent returns over the long run…
As we wrote when we first recommended this stock, “The longer you hold this stock, the more rapidly your wealth will compound, and you’ll never have to sell – ever.”
And as we promised in that original write-up, “When you learn the name of this stock, I promise you’ll smile.”
But we don’t want you to skip ahead. So before we divulge exactly which stock we’re re-recommending, let’s revisit the original rationale for investing in this company. Obviously, the numbers have changed, but the point remains the same. As the original issue said:
This is a slow-growth business. That, surely, will turn off most investors. Most people simply don’t understand the impact of even slow growth over time in businesses that are extremely capital efficient…
In almost every year, the company’s dividends are larger than its capital expenditures. This company rewards shareholders, not its managers…
It’s the impact of these reinvested dividends and the consistent decrease in shares outstanding that most investors do not figure into their future total return equation. And over the last 10 years, the company’s annual capital spending has remained essentially unchanged. Meanwhile, cash profits and dividends nearly doubled.
This is the beauty of capital-efficient businesses: As sales and profits grow, capital investments don’t. Thus, the amount of money that’s available to return to shareholders not only grows in nominal dollars, it also grows as a percentage of sales.
Thanks to share-count reductions, sales growth, and the company’s incredible capital efficiency, it is able to increase its annual free cash flow per share by 15%.
There aren’t many businesses that you can realistically expect to make you 20 times your money. There are even fewer businesses that you can expect to hold safely for 20 years. But in this case, you can.
We think that captures the company today… and wouldn’t change a word of the original.
And we’d like to go even further in showing the power of capital efficiency by comparing the long-term results of two actual companies. The first company is the one described above. That’s Company A. The second one, Company B, is a business we have highlighted many times in the past for how not to operate. Company B is highly capital inefficient.
Over the past 25 years through 2017, both companies grew sales by more than 130%… or by a nearly identical 3.4% per year on average. (We call this average yearly growth calculation the “compound annual growth rate,” or “CAGR” for short.)
But that’s where the similarities end.
Given its capital efficiency, Company A took this somewhat modest 3.4% revenue growth and created a much better return on its invested capital for shareholders. Through a combination of improved operating margins, a 42% reduction in the share count, and virtually no increase in capital spending levels, Company A grew its per-share free cash flow by 15.5% per year. In other words, from just 133% growth in revenues, Company A’s superior business model generated 3,571% growth in FCF per share.
Meanwhile, Company B’s capital-intensive business generated far lower returns from the same revenue growth. Over the same 25-year period, with the same level of revenue growth, Company B’s free cash flow per share actually declined 16%.
Longtime subscribers can probably guess Company A… And Company B? You may have a good guess here as well. It’s industrial conglomerate General Electric (GE).
Below are more details on the 25-year comparison.
Both companies returned considerable capital back to shareholders. They both paid a growing dividend and bought back stock to reduce the number of shares outstanding. But Company A grew its dividend by more than 880%, while GE’s grew about one-fourth as fast.
And more important, Company A’s asset-light, capital-efficient business ensured its FCF could easily cover its large dividend. That’s not true at GE. Prior to recent dividend cuts, GE paid an annual dividend of $0.84 per share… But FCF per share – after accounting for bloated capital expenditures – amounts to only $0.42 per share.
Worse, its per-share FCF still falls short of GE’s new, lower annual dividend of $0.48 per share. This is worrisome and ultimately unsustainable.
Company A’s business is exceedingly sustainable. It’s one of the most sustainable on the planet. And that’s not just because of the capital efficiency. It’s also a result of the enduring nature of the products it sells.
Our grandparents enjoyed Company A’s same product 50 years ago that our great-grandkids will enjoy 50 years from now. And that makes it a must-have in your portfolio… especially after the recent sell-off in the shares.
To be sure, Company A’s stock has done great since we first recommended it. Subscribers who bought the stock in 2007 have enjoyed gains of nearly 170% (and even higher if dividends were reinvested)… far better than the roughly 100% gains the S&P 500 Index produced (including dividends) over that time.
So given that huge return – and even with the stock’s recent decline – Company A must be far more expensive today than it was when we recommended it in 2007, right? Well, no, it’s not. You see, Company A kept growing earnings and FCF over the past decade. So even though the stock price has risen substantially, its valuation (or price relative to its earnings or free cash flow) has not.
Company A’s current valuation level relative to its FCF is nearly identical to its valuation back in 2007.
So why have the shares dropped of late? Why are we getting this chance to buy back in at an attractive price? Put simply, the stock market is concerned about rising costs and shifting consumer behavior.
We find both concerns shortsighted.
Whenever it’s faced cost pressure, Company A has always passed through price increases eventually. Consumers choose products based on brands they love and trust, not based on price. That’s why the penetration of private-label offerings in this industry is less than 4%, among the lowest in all categories.
Similarly, fads come and go. But this product is forever. Company A will continue to sell it to a growing number of global consumers. So when the stock market provides an opportunity like this, we need to take it.
We recommend you BUY shares of Company A today. And to quote our original recommendation… “Expect to hold this stock for an exceptionally long period of time.”
Crux note: If you’re dying to learn the identity of Company A – and why it will serve your portfolio faithfully – you must subscribe to Stansberry’s Investment Advisory. As of today, the stock is still trading below its buy-up-to price.
In the latest issue, Porter also recommends a familiar “Global Elite” business that will act as a safe haven in your portfolio during the turbulent times ahead.
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