Investors have a lot to gain by investing in inflation-protected stocks with a long time horizon.
“The single greatest edge an investor can have is a long-term orientation.” – Seth Klarman
A long-term orientation minimizes transaction costs and capital gains tax. Deferred capital gains tax can compound over time, leading to a ‘Buffett Loan’ of deferred capital gains that can work in favor of shareholders.
Moreover, inflation-beating dividend growth means that shareholders who rely on these companies for retirement income can rest assured that they will not lose real (i.e. inflation-adjusted) purchasing power over time.
This begs the question – how do we find inflation-beating businesses likely to be around in 50 years?
One of the easiest filters is found by applying the Lindy Effect to businesses with long operating histories.
The Lindy Effect states that the observed lifespan of non-perishable items (businesses, ideas, books, etc.) is most likely to be at its half-life.
Said another way, if a business is 100 years old, we should expect it to be around for another 100 years. Similarly, we would expect a 10 year old business to be around for another 10 years.
It is important to note that the Lindy Effect provides an average expectation, and might not necessarily hold for any one company.
One of the best places to find businesses with long operating histories and strong histories of dividend growth is the Dividend Kings – a group of elite companies with 50+ years of consecutive dividend increases.
This article will examine four Dividend Kings with inflation-beating dividend growth that are likely to be around in 50 years.
50 Year Inflation-Protected Stocks #1: Procter & Gamble
Based on their market capitalization of $230 billion, Procter & Gamble (PG) is the largest consumer goods conglomerate in the world.
Procter & Gamble owns a number of highly popular brands, including:
- Head & Shoulders
Certain details about Procter & Gamble’s business can be seen below.
Procter & Gamble qualifies as an inflation-protected stock. They have consistently grown their dividend faster than the rate of inflation.
Procter & Gamble’s dividend history can be seen below.
Source: Value Line
Procter & Gamble has compounded their dividend payments from $0.64 in 2000 to $2.66 in 2016 – which is good for a CAGR of 9.3%.
Despite the company’s strong record of dividend increases, Procter & Gamble has not met investor expectations over the past decade. Since 2007, the company has grown earnings-per-share at 2.1% per year.
This number is significantly worse if we exclude a strong performance from 2007 to 2008. Procter & Gamble has grown the bottom line at 0.1% per year since 2008, on average.
The company’s earnings-per-share trend over the long run can be seen below.
Source: Value Line
Much of this disappointment has been caused by some underperforming brands in the U.S. and the company’s overseas earnings being weighed down by the strong U.S. dollar.
Accordingly, Procter & Gamble is taking measures to restore earnings growth. For instance, some of the company’s less-profitable brands are being divested.
Procter & Gamble is also focused on improving the productivity among their core brands. An example of this is the company’s complicated supply chain.
Procter & Gamble has many core fulfillment centers across the domestic United States which historically have had plenty of overlap. This is not ideal, as there is always a shortest path to a given fulfillment center that will minimize cost.
Procter & Gamble is looking to optimize their supply chain moving forward. This transformation can be seen in the following diagram.
The elimination of overlap from Procter & Gamble’s supply chain will reduce the company’s expenses and boost earnings-per-share.
Along with divesting non-core brands, Procter & Gamble is reducing the number of markets in which they compete.
The company’s simplification efforts are aiming to reduce their product categories by 60% and their number of brands by 70%. This will allow the company to focus on its most profitable avenues.
Similarly, Procter & Gamble is exiting non-core geographies.
As of right now, more than half of the company’s net sales come from outside North America, and the strength of the U.S. dollar has made these international currencies less valuable when reported in USD.
Half of their country clusters will be eliminated during the company’s restructuring efforts.
Aside from restructuring efforts, Procter & Gamble’s shareholders will continue to be rewarded by the company’s substantial capital return program.
In the first half of fiscal 2017 alone, the company returned $15.5 billion to shareholders.
Procter & Gamble shows no signs of slowing down, either – management has communicated the intent to return up to $70 billion of capital to shareholders between fiscal years 2016 and 2019.
Procter & Gamble has a very good chance of still existing in fifty years.
The company was founded in 1837 – 180 years ago. According to the Lindy Effect, Procter & Gamble can be expected to last until the year 2197.
Looking at it another way, if we consider only the period during which Procter & Gamble has consistently raised their dividends (the past 60 years after their increase last April), Procter & Gamble can be expected to last until the year 2077.
With the company’s renewed focus on their core products and business simplification, shareholders are likely to be rewarded along the way.
50 Year Inflation-Protected Stocks #2: 3M
3M (MMM) is the world’s largest diversified manufacturing company with a market capitalization of $112 billion.
Originally named Minnesota Mining and Manufacturing, the company has grown over the years to manufacture more than 60,000 products sold in 200 countries.
3M is divided into five segments for reporting purposes:
- Health Care
- Safety & Graphics
- Electronics & Energy
3M’s Industrial segment is by far the largest. Each segment’s contribution to revenues can be seen below.
Source: 3M 2016 Investor Day Presentation, slide 7
3M qualifies as an inflation-protected stock because of their dividend history.
The company’s payout has increased from $1.16 in 2000 to $4.44 in 2016, good for a CAGR of 8.8%.
3M’s dividend growth has been particularly impressive in the past five years.
Source: Value Line
Recently, 3M’s international revenues have become less valuable when swapped back to USD because of the continued strength of the U.S. dollar.
However, the U.S. dollar is trading above historic levels. When the domestic currency returns to a more normalized level, this will present a tailwind for 3M.
The company will