Classic Stock

Over the last few years I have had the opportunity to attend several concerts by some of the most successful classic rock artists of all-time such as Paul Simon, Eagles, Roger Waters, Bob Seger and John Fogerty. All of the shows were great. Although they do not have the same musical style, they share common traits. They have been performing at a very high level over a long period of time and have continually innovated and diversified their music. The artists (either solo or with their signature bands) have been recording and touring for at least 40 years. Roger Waters just wrapped up a tour which featured the album The Wall, which he wrote and was recorded by his band Pink Floyd in 1979. Eagles, in 1976, released the all-time best-selling album in the U.S. (Eagles: Their Greatest Hits). Group members have indicated that they will celebrate the 40th anniversary of their founding by touring this year. In 2007, the group released an album, Long Road Out of Eden, 28 years after its previous studio album release. It quickly topped the charts and has sold more than 3.5 million units.

 

If you wanted to see some of the “one-hit” wonders of the rock or pop world in concert today you probably couldn’t. They are nowhere to be found.

 

I pick most of my investments in much the same way that I choose which music to listen to and which concerts to attend. I look for companies and funds that have been around for a long time, have performed at a high level, diversify their products and innovate. I ignore the one-hit wonders of the stock world. I look for classic stocks.

 

Proctor and Gamble (NYSE: PG), Coca Cola (NYSE: KO), United Technologies Corp. (NYSE: UTX), and Johnson and Johnson (NYSE: JNJ) are examples of companies in the classic stock category.  All of these stocks are part of the Dow Jones Industrial Average and pay a dividend. All have been successful through the years by innovating and diversifying their offerings.

 

Proctor and Gamble was founded in 1837 by immigrants from England, William Proctor and James Gamble, who settled in Cincinnati (where the company HQ is still located). In 1859, the company posted sales of about $1M and had 80 employees. Today the company boasts sales of $82.6B and employs 129,000 people. Over the years it continually introduced new products such as Crest toothpaste, Tide laundry detergent and Pampers. It has a market cap of $176B. The dividend has been increased every year since 1956. An investment in PG in 1970 of $1,000 would be worth about $34,000 today. Although it is currently going through a rough patch with lower earnings and reduced guidance, it is probably still worthwhile looking into at this point.

 

Coke began as a company in 1892 when Asa Griggs Candler secured rights to the recipe for the original Coca-Cola drink from Atlanta pharmacist John Pemberton, who had invented it and sold it at a local pharmacy for 5 cents a glass. Sales averaged 45 cents per day. Last year the company reported about $46.5B in annual revenue (over $127M per day) and employs 146,000. It currently has a lineup of more than 500 different products, it has a market cap of $181B, and it pays a $2 per share dividend; at the current price that’s about a 2.5% yield.

 

United Technologies Corp. has been part of the Dow and has paid a dividend since the 1930’s. It has a market cap of about $68B. Originally the company was part of a larger company that included Boeing Co. (NYSE: BA) and United Airlines. The parent company of United Airlines is now called United Continental Holdings. Antitrust concerns by the U.S. government resulted in the breakup of the conglomerate into three separate companies. United Technologies was known as United Aircraft Co. until 1975. It was primarily an aerospace company providing such products as jet engines and the NASA space suit but has expanded to include other products such as elevators, air conditioners and fuel cells. A $1,000 investment in UTX in 1975 would be worth about $50,000 today. Recently UTC acquired Goodrich Corp. and integrated it into its aerospace operations and is poised for expanded growth as the result.

 

Johnson and Johnson, incorporated in 1886, was founded by a trio of brothers, Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson who created a line of ready-to-use surgical dressings in 1885. It has consistently been recognized as one the most admired and respected companies in the world, including by Barron’s magazine. It has a market cap of $190B, the largest of the companies discussed in this article, posted annual sales of about $65B in 2011 and has 118,000 employees. It has a healthy dividend yield of 3.5%. It has continually expanded its product lineup over the years.

 

In contrast, investing in “one-hit” wonders, fads or in companies with less than a "classic stock" culture would have resulted in significant losses for your portfolio. What if you had invested in Merry-Go-Round (remember the rayon clothing fad in the early 1990's), Palm, Iridium or GM? A current one-hit wonder may be Facebook. It has existed only for a few years and just went public. It isn’t a classic stock yet.

 

So the trick will be to try to identify the truly classic stocks and avoid the one-hit wonders. It may require you to try to project much further into the future than usual or really look at the company culture. Looking back a long time may be one way to help do that. If a company’s current behavior mirrors what it or other companies have done in the past, future success is a good possibility.

 

Don’t buy a fad. Paraphrasing Pete Townsend of the classic rock band The Who, “don’t get fooled again” should be your motto.