Intrinsic Value

Price is what you pay, value is what you get

- Warren Buffett 

The market for stocks goes above and below intrinsic value all the time.

Share prices are more volatile than cash flows. Share prices are more volatile than dividends too.

Even for large blue chip companies, share prices tend to be too volatile. This can be evident when reviewing P/E ratios over a given year for any company really.

For example, Apple (AAPL), has traded between a low of 164.08 and a high of 237.23 over the past 12 months. That's a very high amplitude of over 40% in a given year for one of the largest and most widely held companies on earth, which is followed by so many analysts.

Those cashflows and the intrinsic value of the business did not move by 40% in a single year. It's prices, driven by the fear and greed of market participants, which overshot on the upside and on the downside.

This presents you with some opportunity for the enterprising investor.

In general, it is probably better to buy shares in a good company when it is selling at a relatively cheap valuation.

However, most great companies tend to grow intrinsic value over time. That's because they are able to grow earnings and dividends over time.

Hence, the risk is that the investor who waits for too long to acquire such shares at a discount may end up missing out on a lot of returns. 

On the other hand, there is also the risk that the investor has unfortunate timing and ends up buying a little too high, after which he may have to experience some reversion to the mean over a period of a few years, which could end up testing their conviction.

A lot of value investing has tended to focus on buying low and selling high. I believe that once a good company is acquired at a good price, the job of the investor is to sit tight and let the power of compounding do the heavy lifting for them.

In the Words of Warren Buffett: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

I believe that buying a great company at a decent price is a good strategy. In effect, it makes sense to acquire a great company at a P/E of 15, versus 20 or even 25. 

However, if you do not invest at a P/E of 25, and waited for a P/E of 15 or 20 that never comes, you may miss out on a ton of compounding. 

After all, the real wealth in investing comes from growth in earnings per share and dividends. Changes in valuation do tend to matter in the short-run ( 1 - 5 years), but their importance tends to diminish after a decade of investing.

As we have discussed before, investing is a game of trade-offs. The optimal path is to have the right margin of safety along those various trade-off paths. 

Investing is part art, part science. 

Two Dividend Raises From Last Week

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings and identify companies for further research.

I typically focus on companies that have managed to increase dividends for at least a decade. This helps me focus on those companies that have the durability of a business model that could potentially support decades of dividend increases into the future. Or so I have reasonably have come to believe.

This quick overview also showcases the type of review I do of individual companies, in order to determine if I want to put them on my list for further research or not.

Over the past week, there were two companies that both increased dividends and also have a ten year track record of consistent annual dividend increases under their belt. The companies include:

Brady Corporation (BRC) manufactures and supplies identification solutions (IDS) and workplace safety (WPS) products to identify and protect premises, products, and people in the United States and internationally. 

Brady raised quarterly dividends by 2.10% to $0.24/share. This dividend represents the 39th consecutive annual increase in dividends.  Over the past decade, the company has raised dividends at an annualized rate of 1.91%. The current dividend increase is roughly in line with the historical average for Brady.

The company managed to grow earnings from $1.08/share in 2015 to $4.08/share in 2024.

Analysts expect Brady Corporation to earn $4.49/share in 2025.

The stock sells for 16.10 times forward earnings and a dividend yield of  1.32%.

Verizon Communications Inc. (VZ) engages in the provision of communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. It operates in two segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business).

Verizon raised its quarterly dividends by 1.90% to $0.6775/share. This is the 18th consecutive year Verizon’s Board has approved a quarterly dividend increase. Over the past decade, the company has managed to grow dividends at an annualized rate of 2.37%. The current dividend increase is roughly in line with the historical average for Verizon.

“Our strong focus on three key pillars – wireless service revenue growth, adjusted EBITDA expansion, and free cash flow generation – has once again put the Board in a position to raise the dividend," said Chairman and CEO Hans Vestberg. "This unwavering commitment to our strategic priorities, combined with our consistently disciplined financial management and our dedication to serving our customers with the best in mobility and broadband, continue to position us well for future growth."

The company managed to grow earnings from $2.42/share in 2014 to $2.76/share in 2023.

Analysts expect Verizon to earn $4.56/share in 2024.

The stock sells for 9 times forward earnings and a dividend yield of  6.58%.

Relevant Articles:

- Four Dividend Growth Stocks Raising Dividends Last Week

- Seven Dividend Growth Stocks Rewarding Shareholders With Raises

- Five Companies Confidently Raising Dividends to Shareholders

- 21 Dividend Growth Stocks Raising Dividends Last Week

Peter Lynch on Big Winners and Patience

The companies that do well, look out five, six, seven years, and some decisions they make may not be the right thing for the next year.”

Peter Lynch

The typical big winner generally takes three to ten years or more to play out.

I was reminded of this quote by Peter Lynch as I was reviewing the results from Hubbell (HUBB)

You can see that the company has basically more than tripled in price over the past decade

However, most of the gains in the share price occured in the past four years.

The first six years were basically a slow grind going nowhere, whipsawing the weak hands as the price went up and down, up and down...

That price action basically wears out many. But it's a good reminder that share prices do not go up in a linear fashion. You need to have the patience to hold on through the turbulence.

But you can only be patient if you have done the work and you can afford to invest with a long-term mindset. A long-term mindset is anything over 5 to 10 years. 

If you were overleveraged, chances are you wouldn't have stuck to the compay. If you constantly compared the results to other investments, you wouldn't have stuck with the company. If you invested with money you actually needed in the short run, you wouldn't have stuck with the company either. If you had a concentrated position in this security, you wouldn't have stuck to it either.

This is where we also have the Buffett quote that the market is not there to guide you, but to serve you.

In terms of results, the company grew EPS from $5.52 in 2014 to $14.14 in 2023. Hubbell is expected to earn $16.39/share in 2024.

Growth in earnings per share was not linear either, further questioning the patience in investors.

Yet, patience was the required ingredient for investors in Hubbell over the past decade. Those who held on for 6 years, with little to show for it, have been rewarded in the past 4 years. Basically most of the share price gains/returns occured in the past 4 years.

This is where being a dividend growth investor is helpful. When you are paid to hold, you can afford to be patient. It's even easier to hold if you are paid a rising stream of dividends every single year. You focus on the fundamentals, and see that this rising dividend is fueled by a rising earnings per share (fundamentals).

In 2014, shareholders collected $2.06 for each share they owned. That amount kept climbing every single year and they collected $4.58/share in 2023.  They are on track to collect almost $5/share in dividends this year, assuming a dividend increase in October that is in line with prior year's.

In terms of valuation, the stock sold at roughly 21 times forward earnings in 2014. It sells for roughly 24 times forward earnings today. 

So most of the total returns came from fundamentals - rising earnings per share and reinvested dividends.

Total returns were 365% since January 2014. 

If you focus only on share price increases that's only 267%. 

As we know, returns are a function of:

1. Dividends

2. EPS Growth

3. Change in valuation 

I believe that focus on 1 helps me focus on 2. I also believe that 3 matters the least in the long run, though it produces a lot of noise in the short run. Albeit for an intelligent investor, taking advantage of Mr Market can be beneficial. In the long run, ignoring it may be a good policy overall however.

Now we also learned that returns are not linear, and do not happen on a neat predictable schedule.

It's important to be patient, if you want to stand a chance of making money as an investor.

This example with Hubbell illustrates that Peter Lynch quote perfectly.

The typical big winner generally takes three to ten years or more to play out.

I will end this post with another Peter Lynch quote on holding on to companeis with stagnant share price, where the fundamentals are improving (and valuation is getting cheaper)

“If a stock has gone sideways for a couple of years, and the fundamentals are decent, and you can find something new that's positive in the company, then if you're wrong, the stock will probably continue to go sideways, and you won't lose a lot of money. But if you're right, that stock is going north.”

Peter Lynch

These are just some random thoughts I have as I am doing some random reviews and the folgers is about to kick in. They may make it into an article/blog post somewhere down the line....

Relevant Articles:

- Peter Lynch Investing Quotes

- Peter Lynch Articles For Worth Magazine

- Peter Lynch on Dividend Growth Investing

- 25 Golden Rules for Investing by Peter Lynch

- Peter Lynch Portfolio Holdings at the Fidelity Magellan Fund

Mistakes of Omission

According to Buffett, his biggest mistakes by far have been mistakes of omission. For example, in a talk founder Bill Gates in 1998 at the University of Washington Business School, Buffett explained:

"I've made all kinds of bad decisions that have cost us billions of dollars. They've been mistakes of omission rather than commission. I don't worry about not buying Microsoft, though, because I didn't understand that business. And I didn't understand Intel (INTC). But there are businesses that I did understand--Fannie Mae was one that was within my circle of competence. I made a decision to buy it, and I just didn't execute. We would've made many billions of dollars. But we didn't do it."

These mistakes don't show up in Berkshire's investment returns, but they are a genuine opportunity cost for the group and its investors.

Buffett's right-hand man and vice-chairman of Berkshire, Charlie Munger, elaborated on this topic at the group's 2001 annual shareholder meeting, saying, "The mistakes that have been most extreme in Berkshire's history are mistakes of omission. They don't show up in our figures. They show up in opportunity costs."

I tend to review past decisions, which is helpful in my improvement as an investor. As an investor, some of my biggest mistakes have been mistakes of omission as well. 

For example, I have missed out on investing in companies that I understood, and were available at a good price. But I never quite pulled the trigger.

One example includes Microsoft (MSFT), which was available at a silly low valuation in 2009, 2011 and 2012 and 2013. I didn’t pull the trigger, despite spending my days in Microsoft Word and Microsoft Excel and Microsoft PowerPoint. And I still do. The fundamentals were solid, but the reason I didn’t invest was fear of change. I now think those fears were overblown, but didn’t think so then. Either way, I missed out on a 10 bagger.

Another example includes Intel (INTC), which was also available at a silly low valuation at thte time. I also didn’t pull the trigger due to fear of change. I didn’t understand it as much I wanted. In hindsight, missing out on Intel was fine, because while the company did work  well initially, it has now not done as well. However, the issue is that my initial investment would have been limited to the amount I invested. Which would have limited my potential loss and exposure. But this thinking that prevented me from investing in Intel also prevented me from investing in Microsoft. Microsoft was a 10 bagger, and would have paid for 10 intels that went completely belly up. 

With investing, the risk of loss is limited to the amount I invested in. But the upside is unlimited. What matters is how much you make when you are right, and how much you lose when you are wrong. That doesn’t mean to blundly take risks of course. But this example really shapes my view that I should have taken more risks, due to the assymetrical nature or risk/reward. Even if I was wrong 9 out of 10 times, which is way too conservative, one Microsoft would have still overcome the 9 Intels and resulted in an overall net profit. The important thing of course would have been to identify it and buy it in the first place.

Note that in the case of Microsoft I did end up pulling the trigger a few years ago. While the stock price was up and valuation was more expensive than a decade ago, it was still reasonable at the time. Just because a stock is at a 52 week high does not necessarily mean that the stock is overvalued. 

I have also missed out on investing in companies within my investable universe, mostly because I had stringent entry criteria. 

In addition, a stock selling at 25 times earnings and a "low" dividend yield of 1.80% that can grow those earnings and dividends can turn out to be "cheaper" than a stock selling at 14 times earnings and a dividend yield of 3.50% - 4%. Especially if the higher yielding stock fails to grow earnings per share.

I am basically comparing investing in Microsoft in 2017 versus investing in Pfizer or Verizon back then.

Investing is all about trade-offs. I often ask myself if I am being disciplined by having a strict entry criteria or whether I am being stubborn. An overview of my past decisions, coupled with studies of the old manuals of dividend achievers has shown me that the highest future yields on cost tended to come from companies with lower current yields. Which is why I eventually removed my entry criteria. But it took a lot of years to get there. I have also been relaxing my P/E ratio criteria as well.

Again, investing is all about trade-offs. On one hand you could say that I am being flexible in adapting to the real world environment. On the other hand however you could say that I am perhaps succumbing to Fear of Missing Out (FOMO). Just like everything else in life, it depends. It’s all a fine balance between two extremes that we need to walk on, day in and day out.

I mentioned above that I have relaxed my entry criteria. I do try to take into consideration the trade-off between dividend yield and dividend growth, and try to estimate the likelihood that future earnings and dividend growth can have a long runway. It’s a lot of guesswork, but guess what, a lot of investing is about guesstimates and probabilities, while estimating payoffs and frequencies of those payoffs as well.

The end result is trying to learn and improve.

For example, I learned a ton by studying other investors and investment strategies. A common denominator is casting a net on an investable universe, and then patiently holding tight for a long period of time. This patience allows for the best companies to compound uninterrupted, and rise to the top. All of this “patient inactivity” allows the power of compounding to do its heavy lifting. The most important rule is not to interrupt the power of compounding by doing something silly like selling too early or worse, not buying in the first place.

For example, I have been reviewing the list of Dividend Aristocrats for as long as I have been writing about Dividend Growth Investing on this blog.

I once compiled the returns of the 2011 Dividend Aristocrats List. I then traced to see the returns of each company over the next decade or so. I have done that for the 2013 list as well..

I owned a lot of the companies listed there. But I also had a few companies I never really invested in, for one reason or another. Mostly “reasons”. 

I for example never invested in Cintas (CTAS). Cintas is the best performing dividend aristocrat ove the past decade. The stock was never really that expensive in the first place, although it is expensive today.

The irony is that the stock is not a company that is mentioned by other dividend investors. Nobody talked about it.

Many missed it.

Perhaps that’s because it had a small yield? However, the subsequent growth in earnings per share led to high dividend growth, which has translated into high yields on cost for those investors from say a decade or so ago. Much higher than the higher yields that never grew by much, which many seem to be obsessing over.

Either way, it just shows that one never really knows for sure. Perhaps casting a wider net of opportunities may be a better idea than being too restrictive. That’s because those tails may drive the distribution of statistical outcomes. Even if the expectation is that most things would more or less stay the same, it may be worth it to position yourself for surprises, just in case.

One of the most eye opening experiences has been studying index fund returns. Index funds never really take into consideration valuation. And they tend to weight portfolio companies based on market capitalization. And in general, they do not really make a lot of decisions. Yet, they do really well, relative to other investors, despite all of that. Their success is due to the fact that they do not force their opinions in general, but rather follow what’s working and stick with it. They basically cast a wide net over opportunities, giving them the chance of owning the next winner. Then they basically stick to owning that company, forever. A lot of those companies fail, but a few succeed. Those successes tend to really outshine the losers, and still result in the overall performance of 10%/year for the portfolio (at least historically). While some companies end up being overvalued and losing money, a few end up being correctly valued, even if they seem so at the time. Identifying those future winners, and sticking to those companies, through thick or thin, is very difficult. Yet, index funds succeed in that. 

It's very hard to predict the future, and profit from it. So casting a wide net, and sticking to investments seems like a good process. My opinions, feelings, and attitude towards a company may actually turn out to be impediments to buying right and sitting tight. It’s something I often think about..

Today we discussed mistakes of ommission, which can be the costly mistake of not pulling the trigger on an opportunity. We also reiterated the importance of auditing your investing decisions, in order to improve as an investor over time. We have a lot of ignorance, and to succeed as investors we need to devise a plan and strategy to remove it bit by bit over time, in order to improve and succeed as investors.

I will conclude this post by the following quote from Charlie Munger, who was the right hand man of Warren Buffett.

“The main contribution of [buying See’s Candies] was ignorance removal. If we weren’t good at removing ignorance, we’d be nothing today. We were pretty damn stupid when we bought See’s – just a little less stupid enough to buy it. The best things about Berkshire is that we have removed a lot of ignorance. The nice thing is we still have a lot more ignorance left. Another trick is scrambling out of your mistakes, which is enormously useful. We have a sure to fail department store. A trading stamp business sure to fold and a textile mill. Out of that comes Berkshire. Think about how we would have done if we had a better start.” “See’s Candies was acquired at a premium over book (value) and it worked. Hochschild,Kohn, the department store chain (in Baltimore), was bought at a discount from book and liquidating value. It didn’t work. Those two things together helped shift our thinking to the idea of paying higher prices for better businesses.”

Relevant Articles:

- The Best Performing Dividend Aristocrat Over The Past Decade

- Audit your investment decisions

- Investing Lessons Learned From 15 Years of Writing

- Investing in the Dividend Aristocrats from 2011

- Investing in the Dividend Aristocrats from 2013

Four Dividend Growth Stocks Raising Dividends Last Week

I review dividend increases weekly, as part of my monitoring process. This exercise helps to keep me informed on developments from companies I own and companies I may be interested in.

I typically focus my attention on those companies that have increased dividends annualy for at least ten years in a row. 

There were four companies that raised dividends last week, which also have a ten year track record of annual dividend increases as well. The companies include:

Capital City Bank Group, Inc. (CCBG) operates as the financial holding company for Capital City Bank that provides a range of banking- related services to individual and corporate clients.

Capital City Bank raised quarterly dividends by 9.50% to $0.23/share. This is the tenth consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 35.26%. That's mostly because it started out with a small dividend and a low payout ratio a decade or so ago after suspending dividends after the financial crisis.

The company managed to grow earnings from $0.53/share in 2014 to $3.08/share in 2023.

The company is expected to earn $3.09/share in 2024.

The stock sells for 11.20 times forward earnings and yields 2.67%.

Ingredion Incorporated (INGR) manufactures and sells sweeteners, starches, nutrition ingredients, and biomaterial solutions derived from wet milling and processing corn, and other starch-based materials to a range of industries in North America, South America, the Asia Pacific, Europe, the Middle East, and Africa.

Ingredion raised quarterly dividends by 2.60% to $0.80/share. This is the 14th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company managed to grow dividends at an annualized rate of 7.59%.

The company managed to grow earnings from $4.82/share in 2014 to $9.74/share in 2023.

The company is expected to earn $9.94/share in 2024.

The stock sells for 13.50 times forward earnings and yields 2.38%.

Lam Research Corporation (LRCX) designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits.

Lam Research raised quarterly dividends by 15% to $2.30/share. This is the tenth consecutive annual dividend increase for this newly minted dividend achiever. Over the past five years the company has managed to grow dividends at an annualized rate of 12.70%.

The company managed to grow earnings from $4.11/share in 2015 to $29.13/share in 2024.

The company is expected to earn $35.84/share in 2025.

The stock sells for 22.90 times forward earnings and yields 1.12%.

Peoples Ltd. (PPLL) operates as the holding company for PS Bank that engages in the provision of various financial services to individuals, small businesses, and corporate customers in Pennsylvania, the United States.

Peoples raised quarterly dividends by 1.60% to $0.63/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the comapny has managed to grow dividends at an annualized rate of 9.80%.

The company managed to grow earnings from $3.63/share in 2014 to $8.93/share in 2023.

The stock sells for 8.90 times earnings and yields 3.85%.

Altria, Dividends and Total Returns

Altria (MO) reached an all time high of $77.79/share in 2017

Today, the stock sells for $53.50/share

If you look at prices alone, you can reach all sorts of conclusions

However, share prices do not really tell the whole story. 

If you look at total returns, which takes into consideration the impact of reinvested dividends, you can see a different picture

You can see that shareholders who bought at the highs in 2017 are making a profit, when taking into consideration the impact of reinvested dividends.

Those rising dividends mattered, because they allowed shareholders to reinvest on a predictable schedule into more stock. Holding on to a rising dividend over time, aka being paid to hold and being paid to wait, definitely made it easier to stick to Altria through the ups and downs as well. It's easy to be patient when you are showered with rising streams of cash.

I wanted to take something else into consideration as well.

Notably valuation and the sources of returns.

As we have discussed before, shareholder returns are a function of:

1. Dividends

2. EPS or FCF/Share Growth

3. Change in Valuation 

The first two items are the fundamental sources of returns, which tend to drive most if not all investor returns over the long run.

The last item is the speculative source of return. It is noise, that is impacted in the short run by investors moods of fear and greed. Over the long run, changes of valuation account for pretty much no returns. 

Over the short-run however, they do impact returns due to their inherent noise. 

Intelligent investors either tune this noise out or take advantage of it (e.g. buy good quality companies at a depressed valuation).

In the case of Altria, FCF/Share rose from $1.86 in 2016 to $2.45 in 2017 all the way up to $6.07 in 2023.

Annual Dividends Per Share rose from $2.35 in 2016 to $2.54 in 2017 to $3.84 in 2023

This means that at the highs in 2017, the stock was selling for 31.75 times forward FCF for 2017 or a whopping 41.82 times PY FCF  (2016). 

That was a pricey stock back then, as investors were excited to hold a staple with recession resistant cashflows, which were also expected to grow at a steady clip over time.

Forward Dividend yield was at 3.26%.

Fast forward to today, the dividend yield is at 7.70%, as the annual dividend is $4.08.

The stock sells at only 8.80 times FCF from 2023. 

Despite the fact that FCF/share has basically tripled from 2016 to 2023, the stock price declined.

That's because valuation decreased from very overvalued in 2016/2017 to undervalued in 2023/2024,

This low valuation since at least 2019 has actually been beneficial for those who reinvest their dividends. That's because you get more bang for your buck when you reinvest at a lower price than when you do at a higher price.

Share price returns resulted in a negative source of returns due to the valuation collapse.

But dividends accounted for basically all the total returns.

If the stock had remained at an FCF Multiple of 30 however, Altria would have been selling for over $180 per share today. 

Back in 2016/2017, folks were excited for the stock, willing to pay a premium for it. Perhaps they were excited for the prospects of the business, which were good.

Today, they are depressed by the stock, and willing to give it away for a pittance. I believe the prospects of the business are still as good. You can also see that the business can withstand some management incompetence as well (e.g. Juul) and still do well. 

Perhaps in a few years, the business would be re-valued by the marketplace and command a higher multiple. But I do believe that it would still continue to have good fundamental returns, and that it would have a higher FCF/share in a decade. Plus, the business would continue to shower shareholders with rising annual dividends.

Today, we learned about the importance of dividend reinvestment.

Dividends are an important portion of total returns. Hence, when you look at performance metrics, make sure to look at total returns, not just prices alone.

Today, we also learned the sources of total returns over time. It is helpful to break returns down by sources, in order to understand what really happened.

Those are just a few random thoughts I have, which made it into this article. I would likely keep updating/reformating going forward...

94 Investing Lessons from Warren Buffett

Warren Buffett turns 94 today!

The super-investor from Omaha has achieved quite the investment record at Buffett Partnership and Berkshire Hathaway. He needs no introduction.

I compiled a list with 94 investing lessons I learned from him:

1. “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”

2. “Remember that the stock market is a manic depressive.”

3. “The most important thing to do if you find yourself in a hole is to stop digging.”

4. “Price is what you pay. Value is what you get.”

5. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

6. “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

7. “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

8. “Risk comes from not knowing what you are doing.”

9. “Never invest in a business you cannot understand.”

10. “If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement.”

11. “In the business world, the rearview mirror is always clearer than the windshield.”

12. “Time is the friend of the wonderful company, the enemy of the mediocre.”

13. “The three most important words in investing are margin of safety.”

14. “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

15. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

16. “On the margin of safety, which means, don’t try and drive a 9,800-pound truck over a bridge that says it’s, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds.”

17. “If a business does well, the stock eventually follows.”

18. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

19. “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

20. All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies

21. I never attempt to make money on the stock market. I buy on the assumption that they'd close the market the next day and not reopen it for 10 years

22. “It is a terrible mistake for investors with long-term horizons — among them pension funds, college endowments, and savings-minded individuals — to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks.”

23. Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in 1 month by getting nine women pregnant

24 The stock market is designed to transfer money from the active to the patient

25. “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”

26. “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

27. “Our favorite holding period is forever.”

28. “An investor should act as though he had a lifetime decision card with just twenty punches on it.”

29. “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”

30. “Time is the friend of the wonderful company, the enemy of the mediocre.”

31. “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’”

32. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

33. “There seems to be some perverse human characteristic that likes to make easy things difficult.”

34. “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

35. “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.”

36. “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”

37. “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

38. “What counts for most people in investing vs saving is not how much they know, but rather how realistically they define what they don’t know.”

39. “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”

40. “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

41. “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

42. “It’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.”

43. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital

44. Diversification is protection against ignorance. It makes little sense if you know what you are doing

45. “Wide diversification is only required when investors do not understand what they are doing.”

46. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

47. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”

48. “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”

49. “Widespread fear is your friend as an investor because it serves up bargain purchases.”

50. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

51. “The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

52. “Speculation is most dangerous when it looks easiest.”

53. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

54. “Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

55. Most common cause of low prices is pessimism; sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not bc we like pessimism but bc we like the prices it produces. It’s optimism that's the enemy of the rational buyer

56. “After 25 years of buying and supervising a great variety of businesses, Charlie [Munger] and I have not learned how to solve difficult business problems. What we have learned is to avoid them.”

57. “Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game.”

58. “If past history was all that is needed to play the game of money, the richest people would be librarians.”

59 “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

60. “The investor of today does not profit from yesterday’s growth.”

61. “What we learn from history is that people don’t learn from history.”

62. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

63. “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

64. “Only when the tide goes out do you discover who’s been swimming naked.”

65. “Predicting rain doesn’t count, building the ark does”

66. “This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions”

67. “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”

68. “Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”

69. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

70. “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”

71. “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”

72. “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”

73. “Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.”

74. “Honesty is a very expensive gift. Don’t expect it from cheap people.”

75. “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

76. “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

77. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

78. “Someone’s sitting in the shade today because someone planted a tree a long time ago.”

79. “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

80. “The difference between successful people and really successful people is that really successful people say no to almost everything.”

81. “You’ve gotta keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.”

82. “In the world of business, the people who are most successful are those who are doing what they love.”

83. “It is not necessary to do extraordinary things to get extraordinary results.”

84. “Tell me who your heroes are and I’ll tell you who you’ll turn out to be.”

85. “The best thing I did was to choose the right heroes.”

86. “Chains of habit are too light to be felt until they are too heavy to be broken.”

87. “The most important investment you can make is in yourself.”

88. “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

89. “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.”

90. “Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body."Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.”

91. “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic....and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

92. “I call investing the greatest business in the world … because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost.. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

93. "One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future."

94. "The trick is, when there is nothing to do, do nothing."

There are no strikes for not swinging!

I hope you enjoyed this collection of 94 timeless pieces of wisdom for Buffett's 94th Birthday!

I would encourage you to read:

- Buffett Partnership Letters

- Berkshire Hathaway Annual Letters to Shareholders

- The Snowball

Thank you for reading!

Dividend Growth Investing Explained

Dividend Growth Investing (DGI) is a strategic approach to stock market investing that prioritizes companies known for consistently increasing their dividend payouts over time. This method is particularly appealing to investors focused on generating a steady income stream, especially those planning for retirement.

Key Aspects of Dividend Growth Investing:

1. Dividend Growth Rate: This refers to the annual percentage increase in a company's dividend payout. Investors in this strategy seek out stocks that not only pay dividends but have a history of increasing them regularly. This growth rate is a critical factor because it can indicate the financial health and stability of a company.

2. Investment Goals: The primary goal of DGI is to provide investors with a growing income over time. Unlike strategies that focus solely on high yields at the moment of investment, DGI emphasizes the potential for dividend increases, which can lead to higher returns through compounding.

3. Company Selection: Selection criteria typically include companies with long histories of dividend increases, robust financial health, and sustainable payout ratios. These companies are often well-established with stable earnings, making them less volatile during market downturns.

4. Compounding Dividends: A significant advantage of DGI is the ability to reinvest dividends to purchase additional shares, which can accelerate the growth of the investment portfolio over time. This compounding effect can significantly enhance wealth creation, particularly in a long-term investment horizon.

5. Risk Management: Historically, companies that consistently grow their dividends are less volatile than non-dividend-paying stocks. This characteristic makes DGI a potentially safer option during economic uncertainties, providing a cushion against market volatility.

Practical Example:

Consider a company like Procter & Gamble, which has increased its dividend for 67 consecutive years. Investing in such a company could not only provide a reliable income stream but also the potential for income growth, outpacing inflation and increasing the investor's purchasing power over time.

Conclusion:

Dividend Growth Investing is a robust strategy for those seeking a blend of income stability and potential for long-term capital appreciation. By focusing on companies with a proven track record of dividend growth, investors can enjoy a relatively stable and increasing income, making it an excellent strategy for long-term financial planning, particularly for retirement.

This strategy aligns well with conservative investment philosophies and those who prioritize income over high-risk capital gains. It offers a prudent way to build wealth while mitigating risks associated with market fluctuations.

Audit your investment decisions

 One of the best things you can do as an investor is to audit your investment decisions.

This is an underrated factor that can help improve as an investor.

Very few investment books ever mention this crucial aspect of investment. But all successful investors practice it.

Reviewing past decisions is helpful, because it can help you identify recurring patterns, misses and opportunities. By identifying problems and opportunities, and addressing them, the investor can improve over time.

It’s important to take a step back, and try to think clearly about what you are missing. It’s hard to take a look at yourself, and see issues. Growth is painful, but worth it.

Of course, in order to have something to evaluate, you have to have those decision points in handy.

In my case, I have a process I follow. But I also have a lot of write-ups, behind each decision.

I also have transaction histories as well. I also have write-ups and population data.

After doing some reviews and analysis over the years, I have found a few interesting tidbits.

Notably, when it comes to stock analyses, I’ve noticed that the best opportunities basically jumped at me. The data was so convincing, that it just spoke to me. However, if I had to spend a lot of time explaining away why an investment is great, despite the data, I was mostly justifying an average decision.

In addition, I had found that selling has been one of the worst decisions I could make. Early on, I was pretty active in my portfolio. I would buy a security at a good value, and then sell it at what I believed to be a high price. I would then re-deploy funds in what looked like a cheaper security. It’s also likely that I was subconsciously engaged in yield chasing as well. What ended up happening is that that “expensive company” I sold turned out to do very well, growing earnings, dividends and intrinsic value. The cheap company I bought turned out just okay, but nothing spectacular. Even worse, I ended up paying taxes on gains in the taxable account. I learned that once I buy a good quality company, I should pretty much sit tight on it, and do nothing. 

This has further been reinforced by studying my mistakes. A lot of times, compounding is not a straight line upwards. There could be times where a security may be going through some temporary bumps/slumps/noise. This is when everyone gets discouraged. Notably by share price going nowhere, which is when media articles start popping up saying that the stock is not working. That’s noise, but it does wear you out if you pay attention to it. It’s even worse for someone with followers online, because everyone asks you about it. It’s death by a thousand cuts. I have learned to ignore and just stick to it. It’s because long-term investing is simple, but not easy. But in most cases, these consolidation phases tend to wear out the weak hands that never make it in investing. By the time they capitulate, the stock is hot again and “works”. Selling because you are impatient is a mistake. 

In general, selling a stock has been a mistake for me. It has been compounded by the fact that the company I replaced it with tends to do worse than the company I sold. It happens all the time, at least 40% - 60% of the time. But the magnitude of missed economic opportunity is larger than the opportunity I replaced it with.

Being patient with a security provides the maximum opportunity to let compounding do the heavy lifting for me. That doesn’t mean sticking my head in the sand. But it also doesn’t mean just getting scared easily either. It also doesn’t mean never selling – but being extremely careful about why you sell.

These days I rarely sell. The main reasons are a dividend cut and because a company has been acquired. Any other reason to sell has largely been a mistake, on average of course. I would encourage you to review your transaction history, and determine if selling has been a mistake over your investing career.

Seven Dividend Growth Stocks Rewarding Shareholders With Raises

Dividend growth investing is a simple but effective strategy. It is widely misunderstood too.

As a Dividend Growth Investor, I look for companies with a long history of annual dividend increases.

A long streak of consecutive annual dividend increases is typically an indication of a business with strong competitive advantages, good growth prospects, high returns on invested capital, and strong and recurring cash flows. A long streak of annual dividend increases is typical for companies with wide moats, which have tended to grow earnings per share for decades. As a long-term dividend investor, my goal is to identify such a business early in the game, buy it at an attractive price, and ride the economic trend for as long as possible. In other words, I am after companies that can grow earnings and dividends over time. I buy and hold forever, or in my case, for as long as they do not cut dividends.

Before doing so of course, I always review the company, its fundamentals and check the qualitative aspect of the business as well. Once I initiate a position, I also monitor the company for any major developments. But as part of my risk management process, I keep portfolio weights in check, and I very rarely would sell an existing position. I may not add to it if it stops meeting my entry criteria, which is guaranteeing a low allocation, as I build positions slowly and over time.

One of my favorite monitoring exercises is to check the list of dividend increases every week. That way, I get to see if my existing investments continue raising dividends, and if my thesis is still working. I also get to identify companies for future research through this exercise. In addition, I get to read the press releases and gauge managements sentiment towards the near-term prospects of the business.

My weekly review focuses on companies that have increased distributions for at least ten years in a row. During the past week, the seven companies that raised dividends include:

Altria Group, Inc. (MO) manufactures and sells smokeable and oral tobacco products in the United States. 

Altria raised quarterly dividends by 4.10% to $1.02/share. This is the 55th consecutive annual dividend increase for this dividend king. Over the past decade, the company managed to raise dividends at an annualized rate of 7.75%.

Between 2014 and 2023 the company grew earnings from $2.56/share to $4.57/share.

The company is expected to earn $5.10/share in 2024.

The stock sells for 10.30 times forward earnings and yields 7.80%

Avnet, Inc. (AVT) distributes electronic component technology. The company operates through two segments, Electronic Components and Farnell. 

Avnet raised quarterly dividends by 6% to $0.33/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 14.85%.

The company increased earnings from $4.18/share in 2015 to $5.51/share in 2024. Avnet is expected to earn $4.49/share in 2025.

The stock sells for 12.30 times forward earningds and yields 2.40%.

EastGroup Properties, Inc. (EGP) is a self-administered equity real estate investment trust focused on the development, acquisition and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, Arizona, California and North Carolina. 

Eastgroup Properties raised quarterly dividends by 10.20% to $1.40/share. This was the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.90%.

Between 2014 and 2023, this REIT has managed to grow FFO from $3.47/share to $7.79/share.

The REIT has a forward FFO of $8.32/share.

This REIT sells for 22.60 time forward FFO and yields 3%.

MGE Energy, Inc. (MGEE) operates as a public utility holding company primarily in the United States. It operates through Regulated Electric Utility Operations; Regulated Gas Utility Operations; Nonregulated Energy Operations; Transmission Investments; and All Other segments. 

MGE Energy raised quarterly dividends by 5.30% to $0.45/share. MGE Energy has increased its dividend annually for the past 49 years and has paid cash dividends for more than 110 years. Over the past decade, the companythis dividend champion has managed to grow dividends at an annualized rate of 4.55%.

The company managed to grow earnigns from $2.32/share in 2014 to $3.25/share in 2023.

The company is expected to earn $3.69/share in 2024.

The stock sells for 23.64 times forward earnings and yields 2.05%.

Northrim BanCorp, Inc. (NRIM) operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses and professional individuals. It operates through two segments, Community Banking and Home Mortgage Lending.

The company ekes out a 1.60% raise in its quarterly dividend to $0.62/share. This is the 16th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 14.10%.

The bank managed to grow earnings from $2.57/share in 2014 to $4.53/share in 2023. It is expected to earn $5.83/share in 2024.

The company sells for 11.60 times forward earnings and yields 3.60%.

Stock Yards Bancorp, Inc. (SYBT) operates as a holding company for Stock Yards Bank & Trust Company that provides various financial services for individuals, corporations, and others in the United States. It operates in two segments, Commercial Banking, and WM&T.

Stock Yards Bancorp raised quarterly dividends by 3% to $0.31/share. This is the 15th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.10%.

Between 2014 and 2023, the company managed to grow earnings per share from $1.59 to $3.69.

The company is expected to earn $3.69/share in 2024.

The stock sells for 16.30 times forward earnings and yields 2.05%.

United Bancorp, Inc. (UBCP) operates as the bank holding company for Unified Bank that provides commercial and retail banking services in Ohio. 

The company raised quarterly dividends by 1.40% to $0.1775/share. This is the 12th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 8.65%.

The company grew earnings per share from $0.54 in 2014 to $1.57 in 2023.

The stock sells for 8.15 times earnings and yields 5.90%.

Relevant Articles:

- 21 Dividend Growth Stocks Raising Dividends Last Week

- Six Dividend Growth Stocks Raising Dividends Last Week

- Five Companies Confidently Raising Dividends to Shareholders

- Thirteen Dividend Growth Stocks Rewarding Shareholders With Raises

The Best Performing Dividend Aristocrat Over The Past Decade

The Best Performing Dividend Aristocrat over the past decade is a boring business that few ever talk about

The company is Cintas (CTAS), which engages in the provision of corporate identity uniforms and related business services primarily in the United States, Canada, and Latin America. It operates through Uniform Rental and Facility Services, First Aid and Safety Services, and All Other segments. 

This dividend aristocrat has increased dividends to shareholders for 41 years in a row.

It has generated a total return of over 1,381% over the past decade

It's fascinating to dig further into the sources of those returns.

As we have discussed before, total returns are a function of:

1. Dividends

2. FCF/Share Growth 

3. Changes in valuation

Annual dividends increased from $0.77/share in 2014 to $5.40/share in 2024. That's a 601% growth in dividends per share, which is great. Dividend growth was higher than earnings growth notably due to the expansion of the payout ratio from 20% in 2014 to 32.90% in 2024.

Someone who invested in Cintas at the end of 2013 earned a starting dividend yield of 1.30%. However, if they kept the stock they ended up with an yield on cost of 9.06% today (without accounting for dividend reinvestment). If they reinvested dividends, they ended up with an yield on cost of 10.30%. A lot of people would have ignored Cintas in 2013 for the low current yield, and favor higher yielding companies. But fast forward, Cintas now has a double digit yield on cost, while many of those higher yielders have barely managed to grow dividends to compensate for the eroding power of inflation. Plus, with Cintas you had with a very high total return of 1,381%.

FCF/share increased from $3.82/share in 2014 to $16.43/share in 2024. That's a 330% growth in earnings per share over the period, which is a remarkable result. 

The stock sold at $59.59/share at the end of 2013. It sells at $782.95/share now.

Back at the end of 2013, the stock sold at a Price to FCF of 15.60. The dividend yield was 1.30%

Today, the stock sells at a Price to FCF of 47.65. The dividend yield is 0.69%.

The company delivered a total return of roughly 1,381% over that time period.

A large portion of this total return was a result of the valuation multiple increasing from 15.60 times FCF to 47.65 times FCF.

If the valuation multiple had stayed the same, the price would have only increased by 330% - which was the same as FCF/Growth. The price would be $256.30/share, rather than $782.95.

Dividends accounted for a portion of the 1,381% total return as well. If you just look at the share price, total returns would have been 1,210%. So dividends accounted for about 170% of the total returns figure. If the valuation multiple had been lower, dividends would have accounted for a higher portion of the total return.

It seems that the largest contributor to total returns for Cintas over the past decade (or since Dec 2013 to be precise) is the expansion in the valuation multiple.

If it had stayed flat, investors would have generated a total return of roughly 500%. But due to P/FCF ratio increasing threefold from 15.65 to 47.65, total returns shot up to 1381%.

Now I believe that Cintas is indeed a great company, the type of boring sleep well at night time to hold. It is very likely that it would keep growing FCF/share and dividends per share over the next decade. (fundamental returns).

However, the high FCF/share does create a sort of lack of margin of safety for the buyer of stock at today's lofty valuations.

The risk is that valuation mutliples shrink over the next decade or two. After all, those multiples are often times driven by the emotions of the investors out there, who tend to oscilate between fear and greed. Right now, we seem to be in a greed fueled compounder bro bubble of sorts. It's great to buy and hold quality companies, but not at any price.

If you overpay dearly for a future stream of earnings and dividends, you may spend a long time recouping your investment, even if it does perform fundamentally according to plan.

In other words, the risk for todays investor is that the company delivers, but the valuation multiple shrinks. As a result they'd be left with minimal returns over the next decade. Which is eternity in the face of Twitter, where share prices dictate the investment narrative.

For example, if Cintas were to triple earnings per share over the next decade, but the valuation multiple shrinks to 16, the investor would generate small returns. The only source of returns would be the dividend.

Now I am not sure what may cause a decline in the P/FCF ratio. But when you pay a lofty starting valuation, you are basically projecting perfection. Unfortunately, real life is far from perfect.

You do not want to be in a position where you overpaid for a security, which experienced a valuation shrinkage. You definitely do not want to be in a situation where you experience valuation shrinkage coupled with lowered fundamental performance at all.

It's important to have a margin of safety, just in case.

In the words of Ben Graham: “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.”

Realty Income Over The Past Five Years

Five years ago, Realty Income $O sold at $70/share.

Today, the stock sells at $60/share.

Someone who invested 5 years ago and reinvested those dividends ended up with a total return of 8.50% over those 5 years.

However, FFO/share increased from $3.12 in 2018 to $4.08 in 2023. Forward FFO for 2024 is at $4.22.

Monthly dividends went from $0.2193 in Aug 2019 to $0.263 in Aug 2024.

What happened?

As we have discussed before, total returns are a function of:

1. Dividends

2. FCF/Share Growth (in case of REITs - FFO/Share)

3. Changes in valuation

Long-term investors care about the fundamental sources of returns. Those are dividends and FFO/share growth.

In the short term however, changes in valuation could impact returns. Even if a business performs well, a shrinking in valuation multiples could pull returns down. If the valuation increases, then the returns are pulled forward. 

As a long-term investor, I care about fundamental returns, because ultimately, they drive long-term returns. Valuation multiples are affected by investor emotions, which are unpredictable. They are to be taken advantage of, but not really followed blindly.

In the case of Realty Income, the business grew FFO/share by 30.76% since 2018. It grew dividends by 19.92%.

However, the stock price declined by 14.30%. Including reinvested dividends, investors received a total return of 8.50%.

The reason for the decline in share price is the shrinking of the valuation multiple.

The stock sold at an FFO multiple of 22.43 about 5 years ago.  It had a dividend yield of 3.75%.

Today, it sells at an FFO multiple of 14.70. It has a dividend yield of 5.25%.

In fact, Realty Income sells at the lowest valuation in quite some time. This chart below shows the valuation range for Realty Income over the past decade.

The reason for the poor performance in the stock was because investors were over excited about the stock five years ago, and were willing to bid it up. Perhaps that was also because interest rates were low.  Investors were willing to pay a premium valuation for this REIT five years ago.

Today however, investors are not willing to pay premium valuation for this REIT.  Interest rates are also higher as well. 

Predicting investor moods is very hard. Some times they are overly exuberant about a company (like they were about Realty Income in 2019). Other times, they are not excited at all about it (like today).

I believe that the mutliple today appears fine. I have no idea if the FFO multiple would shrink or grow in the future.

I do believe Realty Income will continue to grow FFO/share over time, and its investors would continue to receive their monthly and growing dividends over time. The company has been successful in doing just that for about 30 years as a publicly traded company, through various boom/bust cycles.

Relevant Articles:

- Six Things to Look For in a Real Estate Investment Trust (REIT)

- A look at the past decade at Realty Income

- Realty Income Delivers High Yields and Dependable Dividend Growth

Five Companies Confidently Raising Dividends to Shareholders

I review the list of dividend increases every week in an effort to monitor existing companies I own and potentially identify companies for further research.

I typically focus my attention on companies that have managed to increase dividends for at least ten years in a row. 

I usually review the most recent dividend increase and compare it to the last five or ten years. This gives me valuable information on the consistency and trend in dividend growth.

I also review the trends in earnings per share over the past decade, along with earnings estimates for the near future. Rising earnings are the fuel behind future dividend increases.

I also review valuation as well. Even the best company in the world is not going to deliver good returns if you wildly overpay for it. 

Valuation should incorporate forward returns expectations, such as earnings per share growth and dividends and also include a stress test of potential changes in valuation multiples.

Over the past week, there were 25 companies in the US which increased dividends. Five of them have managed to increase dividends for at least a decade. I have included the companies below and also included management comments from the press releases. I find these comments on dividends and capital allocation to be a good filter for management quality as well. 

They stress factors such as generating strong cashflows, confidence in the business, dividends being part of a disciplined capital allocations framework, generating stable and growing cashflows, having a long history of profitability and growth.

The companies include:

Badger Meter, Inc. (BMI) manufactures and markets flow measurement, quality, control, and communication solutions worldwide.

Badger Meter raised quarterly dividends by 25.90% to $0.34/share. This is the 32nd year of consecutive annual dividend increases for this dividend champion. Over the past decade the company has managed to grow dividends at an annualized rate of 10.96%.

“Our consistent and disciplined approach to serving customers, executing our business strategy and generating strong cash flow has once again put the Board in a position to raise the dividend. A durable dividend is an important component of our capital allocation framework, and we are immensely proud of our now 32 consecutive years of dividend increases.”

Between 2014 and 2023, the company grew earnings from $1.04/share to $3.16/share.

The company is expected to earn $4.29/share in 2024.

The stock sells for 46.60 times forward earnings and yields 0.68%.

This looks like a great business for further research. Unfortunately, the valuation is a little rich for my taste.

Cboe Global Markets, Inc. (CBOE) operates as an options exchange worldwide. It operates through six segments: Options, North American Equities, Europe and Asia Pacific, Futures, Global FX, and Digital.

Cboe raised quarterly dividends by 14.50% to $0.63/share. This is the 14th consecutive annual dividend increase for this dividend achiever.  Over the past decade, the company has managed to grow dividends at an annualized rate of 12.30%.

"The share repurchase authorization increase and increased quarterly dividend are testaments to management and the Board of Directors' confidence in the performance of Cboe's global business lines and adherence to a disciplined capital allocation program. Cboe's balance sheet is strong and has us well-positioned to continue investing in the long-term growth of our business while also returning capital to our shareholders," said Fred Tomczyk, Chief Executive Officer of Cboe Global Markets (CBOE).

Between 2014 and 2023, the company grew earnings from $2.21/share to $7.16/share.

The company is expected to earn $8.64/hare in 2024.

The stock sells for 23.50 times forward earnings and yields 1.24%.

This looks like a great business for further research. The valuation is not cheap, especially compared to the situation a few years ago when I last reviewed it. However, it is promising.

Hyster-Yale, Inc. (HY) designs, engineers, manufactures, sells, and services a line of lift trucks, attachments, and aftermarket parts worldwide. 

Hyster-Yale Materials Handling raised quarterly dividends by 7.70% to $0.35/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 2.64%.

Earnings per share grew slightly from $6.61 in 2014 to $7.35 in 2023.

The company is expected to earn $9.91/share in 2024.

The stock sells for 6 times forward earnings and yields 2.34%.

The company looks optically cheap. The slow rate of earnings growth over the past decade, coupled with a slow rate of dividend growth and the low yield are not very inspiring at this stage.

Nordson Corporation (NDSN) engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids worldwide. It operates through three segments: Industrial Precision Solutions; Medical and Fluid Solutions; and Advanced Technology Solutions. 

Nordson raised its quarterly dividends by 14.70% to $0.78/share. This is the 61st consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to grow dividends at an annualized rate of 15.36%.

“As a high quality growth compounder, Nordson has a long and rich history of profitability and cash flow, supporting 61 consecutive years of paying and increasing annual cash dividends to our shareholders,” said Daniel Hopgood, executive vice president and chief financial officer. “Our focus on the customer, innovation and differentiation, combined with the Ascend strategy, generates consistent cash flows throughout the cycle and allows us to return value to our shareholders as part of our balanced capital deployment strategy.”

Between 2014 and 2023, the company managed to grow earnings per share from $3.88 to $8.54.

The company is expected to earn $9.47/share in 2024.

The stock sells for 25.30 times forward earnings and yields 1.30%.

This looks like a great business for further research. The valuation is not cheap, though not overly expensive either.

Westlake Corporation (WLK) engages in the manufacture and marketing of performance and essential materials, and housing and infrastructure products in the United States, Canada, Germany, China, Mexico, Brazil, France, Italy, Taiwan, and internationally. The company operates through two segments: Performance and Essential Materials and Housing and Infrastructure Products. 

Westlake increased quarterly dividends by 5% to $0.525/share. This is the 20th consecutive annual dividend increase for this dividend achiever. Over the past decade the company has managed to increase dividends at an annualized rate of 15.31%. That was mostly possible due to the expansion in the dividend payout ratio.

Between 2014 and 2023, earnings per share went from $5.09 to $3.72.

The company is expected to earn $7.37/share in 2024.

The stock sells for 19.90 times forward earnings and yields 1.43%.

This sounds like a fair business that is cyclical in nature. Rapid dividend growth over the past decade was possible through the expansion of the payout ratio, while earnings growth was not that high. Future dividend growth would likely be limited to earnings growth over time. If we extrapolate the past decade onto the next, the current valuation does not make a lot of sense to me.

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Warren Buffett on investing and selling

Warren Buffett started his investment career in the 1950s by focusing on traditional value investing strategies, as practiced by Ben Graham

You can rea about the three categories of investments he made here: (Source: Buffett Partnership Letters)

These were plentiful up until the late 1950s and the early 1960s.

It allowed him to compound at high rate of return.

Unfortunately, these started drying up, as the stock market was in the midst of exuberance and stocks were bid up. 

In addition, his assets under management were growing and reaching a big enough size, where he needed larger investments to move the needle. Traditional value investing strategies had a maximum carrying capacity that he had outgrown.

So Buffett had to adapt to his environment.

He still focused on buying value, but had to redefine how value is defined.

“Far better to buy good company at a decent price than bad one at a steal price”

He started understanding the value of franchises.

He did two particular investments at the time.

One was buying Disney (DIS).

Another was buying American Express (AXP). 

He sold Disney for a quick 50% gain.

He held on to AXP and sold for a triple.

He then wound up his partnership in 1969, citing unfavorable and frothy market conditions and started focusing on building out Berkshire Hathaway as his second retirement project. In his words, he had retired at 25 actually.

Yet, while he never really mentions it, he probably saw Disney and AXP delivered amazing returns through 1972. Those companies kept growing and delivering to shareholders. Everyone was enthusiastic about their prospects during the Nifty-Fifty boom. 

Check out the page for Disney from the 1980 Moody's Manual of Stocks

Check this page for American Express from the 1980's Moody's Manual of Common Stocks:

Even after it went bust in 1973- 1974 bear market, these stocks were still selling much above the levels at which Buffett sold them. They then managed to deliver amazing returns too.

However, they were selling at inflated valuations in 1971 - 1972, which were unsustainable. They had in fact pulled forward returns to the present and investors were paying dearly for the growth of the next decade. With a high degree of certainty and lack of any meaningful margin of safety.

Disney sold at 50 - 60 times earnings between 1971 and 1973. That was a time to clearly take advantage of the irrational exuberance and sell. Even in 1970, the stock was selling at a P/E of 30, which was high. By 1980, Disney stock was selling at close to the levels it did close to a decade earlier, and generating no real returns to anyone that bought the stock at those high valuations. That's despite the fact that the company managed to grow earnings per share pretty well. This was a result of the valuation multiple shrinking to a P/E of 11 by 1980.

American Express did sell at a high valuation in 1971- 1973 of roughly 25 - 30 times earnings. It was not as high as that of Disney, but still elevated. Forward returns were also pulled forward in this case as well. By 1980 however, the stock sold at the same levels as those from a decade earlier. That's despite the fact that earnings oer share grew. This lack of returns was mostly as a result of the shrinking in the valuation to a P/E of 7. 

I am sure that this experience reinforced the idea for Buffett to buy quality companies and hold them. If you buy a good business, the right time to sell is never.

This example probably sat on the back of his mind, as Buffett does like to revisit his old investments. That’s how he has come up with the sins of omission and sins of commission.

In hindsight, selling those great businesses when they became too overvalued in 1971- 1972 would have likely been a smart move. But timing is always tricky, and there are also costs associated with selling. You have taxes and opportunity cost – aka the cost you may have sold too early, and that you are wrong on the company you sell. After all, valuation is part art, and part science. A stock may look expensive at 30 – 40 times earnings but only optically. If that company managed to deliver EPS growth that is dependable and long lasting, it may turn out to be a steal in hindsight. On the other hand, a stock selling at a P/E of 10 may turn out to be expensive, if it ends up stagnating EPS or even seeing them decline and turns out to be a melting ice cube.

That being said, at some astronomical price, it may not make sense to hold on to a security, because forward returns may be terrible. Think Nikkei 225 selling at 100 times earnings in 1989 or dot-com companies selling at 100+ times earnings in 1999.

Next, Buffett was able to acquire See’s Candies in 1972 at a very good price and saw it grow earnings at a steady and consistent clip, while also showering him with billions of dollars in dividends to allocate elsewhere.

He then went ahead and bought Coca-Cola in 1988 – 1994. This consumer company kept growing, and investors bid up the stock. It went from 15 times earnings in the late 1980s to close to 30 times earnings in the early 1990s. The stock sold above 40 times forward earnings in 1997 – 1998, which incidentally was also around the time that EPS hit a high point that it didn’t exceed for several years.

A high multiple at the start, coupled with stagnating EPS is a recipe for disaster for investors in a high-flying growth stock. Speculators run for the exits, negative news articles circle around, and the valuation multiple shrinks, leading to poor total returns. Only a consistent and growing dividend could have kept investors sane and holding. 

That being said, Buffett seems to have felt that Coca-Cola is indeed overvalued in 1997  - 1998. He has expressed regrets for not selling it at a high valuation. In hindsight, he could have done well as the stock didn’t have great returns really for a long time as valuation was shrinking. 

In a way he did reduce portfolio exposure to Coca-Cola in 1998, since he acquired General RE, which had a substantial fixed income portfolio. This in effect diluted Coca-Cola impact on Berkshire Hathaway overall portfolio. But he would have likely still done better selling it. I know, hindsight is 50/50. But from a forward returns perspective, it would have made sense to allocate the funds elsewhere. But only because the valuation was egregiously high.

Buffett doesn’t really time the markets. But he does seem to be very picky about buying good companies at a good valuation. A lower valuation provides higher expected returns. 

He does seem to be learning from his lessons, as he has also worked to try and reduce position sizes if valuation is too high.

For example, he recently reduced his exposure to Apple. It makes sense that he is doing this, as Apple has not really grown the business by much, yet sells at a P/E of 32+. The company is great, but overvalued.

The situation today valuation wise is much different than the situation in 2016/2017 when Buffett was buying it at a P/E of 10.

Future returns were pulled forward through that multiple re-rating.

Perhaps Buffett is learning from all his experience after all (of course he is). 

That being said, that doesn’t mean Apple will crumble and fall to zero. It could still deliver very good results and surprise everyone. But from today’s information that we have, the most likely scenario is that forward expected returns are not so hot. Which means that there may be other opportunities that could deliver high expected returns, even after accounting for taxes on sales.

It may not always turn out to be correct. For example, he sold Costco around the $300’s, which was a high P/E. Yet, the stock is now almost a triple from there and still has a high P/E. But those are more of an exception than the rule.

For example, selling at a high valuation may work some times. But others, it may not. In the case of Costco, selling at high P/E in 2017 – 2023 seems to have been a mistake. But selling in 1999 – 2000 would have been a smart choice.

In the case of Coca-Cola, the stock sold at a high P/E as early as 1992. But selling then would have been a mistake as you would have missed on four fold increase in stock prices. But selling at a high P/E of 1997/1998 would have been smart. Again, hindsight is always 20/20. 

While the experience of ignoring high P/E ratios in early 1990s paid off, they were actually costly to ignore in the late 1990s. Some lessons learned during one market environment may turn out to be wrong in another. Some experience is valuable during some times, but detrimental during others.

Perhaps Buffett is selling Apple today because it is overvalued, and earnings per share growth is not really very strong. Any share buybacks to prop earnings growth would not have the same effect at a P/E of 30 that they may have had at a P/E of 10.  He's learned that selling may be a good idea overall, despite the opportunity costs involved. That's because forward return projections do not look very exciting for Apple investors from here.

That being said, Apple has been written off as an "expensive has been" for a long time. Even when the P/E ratio was low about 8 years ago, some folks were arguing that the P/E is high assuming earnings per share collapse as "the company is no longer innovating" amid fears that Apple's products would suffer the fate of other once hot technology companies that went into oblivion (Blackberry anyone?).

So it is possible that Buffett's sale is a mistake. But for his opportunity set, probably not as high probability wise. Of course, the game of investing is about probabilities, and things are not certain until after the fact (which is when you can tally who won and who lost).

The game of investing is fascinating, because there are no hard and fast rules. The same type of logic and reasoning could work very well under one set of conditions, and fail miserably under another. The investor can only hope that consistent application of sound principles could average out to an overall record of profits.

You need to keep learning, but also beware that you may end up being fooled by randomness as well.

However, to stand a chance in this game of investing, you need to try an improve the odds of survival, before improving your odds of succeeding.

Those include buying quality businesses with strong moats at attractive valuations, and then holding them for as long as it makes sense. While this goes contrary to what Buffett does, us mere mortals should diversify and avoid leverage in order to increase our staying power in a position. Last but not least, keeping costs low matters a lot, as well as making sure we have the proper behavioral mindset that would allow us to avoid being scared from stock market fluctuations. However, we do need an exit plan when we buy a stock, and follow it religiously.