Markets
Keep the Best Company
Think of your investments as businesses in the real world, then join up with the best of the best. Here are some stellar suggestions.
By James K. Glassman, Contributing Editor
From Kiplinger's Personal Finance magazine, July 2008
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What if you had the opportunity to join the world's most exclusive golf club (say, Augusta National) -- or buy a house in a beautiful neighborhood, or send your kids to the best college, or buy a fabulous car -- at an affordable price? The choice would be yours alone. No one could keep you out of the club (and the house would be available for the asking).
This happy circumstance is precisely what prevails today in the stock market. Every investor has the chance to become a partner in some of the greatest global companies -- and the partnership interests (call them shares of stock) are going for a discount.
Wonderful businesses
Don't be spooked by all the talk of the subprime-credit crisis. Don't worry about what the Fed will do next or whether the next administration will raise taxes. Your job is to find wonderful businesses whose profits you can share for the next few decades. Or you could ask someone else, such as a mutual fund manager, to find them for you.
Rarely have such clearly excellent companies been available at such clearly terrific prices. A recent letter to clients from Diane Lob, chairwoman of the private-client investment policy group at AllianceBernstein, points out that the equity risk premium -- that is, the extra return from stocks compared with ten-year Treasury bonds -- was 6% at the end of the first quarter, "well above average" and the highest since the collapse of tech stocks in 2000. That's a strong indication that the market is a bargain. "We see potential for outperformance across both the value and growth investing styles around the world," writes Lob.
Of course, prices may go even lower. But no one can accurately predict what a stock will do in the short term, so don't even try. What I am urging is that you stop thinking of your investments as stocks listed in a newspaper. Instead, think of your investments as businesses selling products and services in the real world. Find the best of the best and join up.
Consider Pfizer (symbol PFE). Medicine is shifting from treating acute ailments to chronic ones, to the benefit of long-term drug therapies. Baby-boomers are entering their sixties. The developing world is getting richer and demanding more than the health-care basics. Drug research is getting more efficient, thanks to breakthroughs in genetics. Pfizer is the largest global drug company, with a market capitalization of about $134 billion, sales of close to $50 billion, net profit margins of more than 30% and a balance sheet that merits the top rating for financial strength (A++) from Value Line Investment Survey.
Pfizer stock, however, has dropped 28% in the past year and now trades at a price-earnings ratio, based on 2008 profit projections, of a mere 8 and a dividend yield of 6.5%. Pfizer has problems: Its super-profitable cholesterol drug, Lipitor, will lose its patent protection in 2011, Viagra has many competitors, and the presidential candidates are talking about punishing drug companies for charging too much . These short-term difficulties are well-known and incorporated in the price. But the macro trends are what count for the long-term investor, and they look awfully good.
Forget Pfizer's price and focus on its dividend, which has risen 41 years in a row and is now $1.28 a share, up from 12 cents in 1992. Value Line projects that the dividend payout will rise 5.5% annually. If that rate continues, the dividend will reach $3 in about 15 years. If you pay $20 (the price at the close on May 9) for a share of Pfizer today, then your investment's annual yield by 2022 will be about 15% and rising.
But this is just speculation. What is fact is that you can become a partner in a respected, well-run business, founded in 1849, for about one-third of what you would have paid in 1999.
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