x Abu Dhabi, UAEMonday 24 July 2017

Unsung heroes make the best investments

Even though it may be fun to put your cash with the likes of Google or Apple, the real stars of the investing firmament tend to be much dimmer.

Unilever, which owns many consumer-product brands, is a promising choice when investing.
Unilever, which owns many consumer-product brands, is a promising choice when investing.

In investing, boring is almost always better. It may be fun to participate in a company's meteoric ride up the stock charts by putting your cash with the likes of Google or Apple, but the real stars of the investing firmament tend to be much dimmer. Why? It's simple. There are too many people who think Google is a more interesting long-term play than, say, Procter & Gamble or Coca-Cola. All that investor interest drives the price of exciting shares upwards, which does wonders for those who got in early but means you'll pay a high price if you want to buy now.

Further complicating the case for piggybacking on such growth stocks is their lack of dividends. They book profits in many quarters - sometimes stellar ones - but they typically reinvest every dirham they make in order to fund further growth. That means no dividends for investors, and it means if you own these stocks, you aren't receiving any direct compensation for the company's success. Apple may be selling more iPods and iPhones than you could ever have imagined, but none of the profits from those sales are going directly into shareholders' pockets.

Investors are generally more than happy to let Apple and Google reinvest all their profits as long as their stock prices continue to go up. Without dividends, though, the investor's margin of safety gets a lot slimmer. Returns are tied entirely to capital gains that stem ultimately from what other investors think about the company, not the fundamentals of profits and expansion.If investors aren't getting a slice of company profits, they are also less likely to challenge management over decisions that could affect future growth.

As long as stock prices don't fall, investors have no incentive to make noise if profit growth isn't where it should be. That produces a misalignment between the interests of the company's management and the success of the business. Managers want to please investors by keeping the stock price high in the short term, even at the expense of long-term profits and growth. To be sure, young companies can hardly be blamed for reinvesting profits: they want to grow, and they need money to do so.

Yet as an investor, I would argue that it's better to wait until a company matures and starts paying dividends than to play the growth game and hope for the best. History is full of examples of "hot" companies that never grew into stable mainstays of the corporate world, flaring out before they paid a single dividend. The most obvious and recent example, of course, was the 1990s tech bubble, which caused a lot of excitement and an equal measure of turmoil, without many lasting benefits for shareholders. Before that was the "tronics" boom in the 1960s, when companies were able to boost share prices simply by implying that they were somehow involved in the newfangled electronics business.

That is why the unsung heroes of the market are its cheap stocks that pay dividends. They are inexpensive relative to other shares because people aren't that thrilled about them. They're boring, in other words. But while they may not be the leading lights of a new tech-driven economic order, they tend to be old and stable, and at the same time often have huge and rarely recognised growth prospects.

I'm talking about companies like Unilever, Procter & Gamble, Johnson & Johnson, Kraft, AT&T and ConAgra. These firms make food and medicine and deliver telecommunications services. With the possible exception of the telecoms, most of these firms wouldn't pop up on your radar unless you looked for them. In reality, though, they're all around you. Check the packaging on your soap next time you go shopping. It's probably made by Unilever. I think these companies have a good chance of growing and posting stable - if not increasing - profits over the next 10, 20, 30, 40 or even 50 years.

They make good products that everybody needs, they operate on a global scale, and the population of the world doesn't seem likely to decrease any time soon. Human beings need soap and food, and there are going to be more human beings in the world in the next few decades, barring a series of natural disasters or an all-out nuclear war. As these firms put their tentacles into new markets, they have shown they aren't forgetting the shareholders who own them. ConAgra has paid dividends - now at about 20 US cents per share - since 1987. Procter & Gamble has paid back its investors for about that long, too. Unilever's dividend history goes all the way back to 1985. There have been some blips along the way for all these companies. Nobody's immune to bad economies and bad markets. Even in challenging years, though, these not-terribly-interesting firms haven't left shareholders in the lurch.

If you're a long-term investor, those are the kinds of attributes I would argue you should look for. In any investment, the challenge is to evaluate what, exactly, you are getting by putting your hard-earned dirhams on the line. If all you're getting is voting rights and the hope that a hot stock's price goes up, you're not getting enough. @Email:afitch@thenational.ae