Why Companies Don't Value Your Grandchildren

Jeremy Grantham stood alongside the other doomsayers of the financial crisis before it came crashing down, which helped earn him a soapbox and a crowd of investors that take his insights to heart. His recent quarterly letter delivers more than just results from his fund; it rails against failures of capitalism that threaten the very future of the human race. He may be taking his doomsayer role a bit literally, but he brings up a significant point that every investor should take to heart when searching for stocks to own.

The corporate value of your grandchildren
Like you as an investor, companies would rather have a high return on their investments. For any proposed project, say, a new factory, a rate of return is calculated and compared against a hurdle rate. If the project has a higher rate than the hurdle, it is implemented, and the factory is built. As Grantham explains, a 14% hurdle rate "halves the future value of a dollar every 5 years, so that in 10 years today's dollar is worth 25 cents." With companies focused on the short term, discounting the future so much makes sense. However, when personal investments only return 4% after tax and inflation, individuals value the future much more than companies -- especially when that first grandchild arrives.

In Grantham's words:

For example, let us say that a firm's current actions are going to cost society at large a billion dollars' worth of harm in 50 years. ... The company would feel that pain today as equivalent to only a mere $1 million hit to earnings. Why should they care?

For the private citizen, at a 4% discount rate, the pain is felt as $100 million. If you value your grandchild at $1 million today, a corporation would only value him or her as $1,428 in 50 years.

Companies that do value your grandchildren
How can you protect your grandchildren from today's corporate shortsighted thinking? For one, you could attempt to beat the rate of returns of companies, giving your grandchildren more to weather whatever costs come their way. Of course, this wouldn't be a surefire effort. If only simply announcing a goal of a specific investment return meant guaranteed results...

One goal you can achieve, no matter what, is investing in and promoting companies that place a higher value on the future. These are companies involved in sustainable practices that understand the importance and value of thinking long-term. As one study noted, relatively sustainable companies have beat the returns of their counterparts by 4.8 percentage points annually from 1993 to 2010. Not only could you achieve greater gains, but you will be more comfortable when looking into your grandchild's eyes.

Here is a select group of companies that operate with the long term in mind.

Chipotle Mexican Grill (NYSE: CMG  )
This burrito maker prides itself on the quality of its food, as evidenced by its commitment to provide "Food With Integrity." Recently, Willie Nelson sang for a Chipotle ad that spread the message of its foundation that promotes sustainable farming methods over factory farming. Chipotle has also donated to Jamie Oliver's Food Revolution, which targets obesity in America, the Nature Conservancy, and Farm Aid, which promotes family farms.

Ormat Technologies (NYSE: ORA  )
This producer of geothermal and recovered energy suffered a tough fourth-quarter net loss of $42.7 million, but without a one-time charge would have posted a net income of $18.8 million. Besides offering alternative geothermal energy, Ormat's recovered-energy power plants make use of traditionally wasted heat from industrial processes -- with no extra fuel or emissions.

United Natural Foods (Nasdaq: UNFI  )
Imagine United Natural as the Sysco (NYSE: SYY  ) of natural and organic foods. Of course, operating in food means a slim net profit margin, like Sysco's fourth-quarter margin of 2.44% and United Natural's 1.25%, but the established networks and large economies of scale offer a sizable moat against competitors. United Natural's values are in line with the environment and its largest customer, Whole Foods (Nasdaq: WFM  ) , which contributed 36% of sales. United Natural actually acquired two of Whole Foods' distribution centers in 2010, and further cozied up by extending the contract between the two companies until 2020.

Sysco itself has involved itself in sustainability and social responsibility. It plans to begin disclosing carbon and water surveys in 2013, on top of its current program that measures and aims to reduce the amount of water and pesticides used by its suppliers.

Think of the children
As Grantham states, companies excessively discount future costs. However, investing in companies that think beyond a quick gain in the next quarterly results will better benefit you, your children, and your grandchildren. For more ideas, check out how socially responsible Fool Alyce Lomax invests her portfolio. Additionally, read our free report that teaches you how to build wealth and reveals "3 Stocks That Will Help You Retire Rich."

Fool contributor Dan Newman holds no shares of the companies mentioned above. Follow him @TMFHelloNewman. The Motley Fool owns shares of Whole Foods and Chipotle. Motley Fool newsletter services have recommended buying shares of Chipotle, Sysco, and Whole Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 06, 2012, at 10:00 PM, neamakri wrote:

    Jeremy Graham states that a 14% hurdle rate equals 14% inflation. Sorry, cannot agree. For example if Ford buys steel at one price and adds value to the steel by building a car and makes 14% profit, that is not inflation.

    That being said, I do agree with Jeremy that most of todays companies are very short-sighted. Example: credit card companies want to get rid of card holders in which they only make a marginal profit. So what! A marginal profit is still a profit. Plus they may be younger customers who would stay with you and become more profitable in the future, That is being far-sighted to keep loyal customers to enrich your future returns.

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