Today the real-money Drip Portfolio announces a new purchase, its sixth, and a sell, the first in its four-and-a-half year history.
When we launched in June 1997, one of my unstated goals for this 20-year portfolio was to not need to sell any companies that we purchased. This meant using incredibly drawn out and boring due diligence before deciding to buy something. It also called for luck. Although our analysis in buying Campbell Soup (NYSE: CPB) ultimately proved flawed, perhaps what we really needed was just a little luck.
Just about everything that could work against us in an investment has done so with the soup giant. In fact, we already stopped buying Campbell Soup long ago -- in September 1998 -- and therefore it is our smallest position. Now we're selling our shares for several reasons, those primarily being:
Despite several years of effort, the company hasn't found a way to consistently grow earnings by double digits or even strong single digits.
The company added significant fees to its dividend reinvestment plan, both for optional cash purchases and dividend reinvestment, largely defeating the benefits of the plan for small investors.
The company is taking on more debt, with an additional $200 million in 10-year notes sold last week, adding to Campbell's $2.7 billion in mostly recent long-term debt.
The company now has more than $4 billion in total debt and only $35 million in cash and equivalents.
Despite an inventory overhaul, inventory levels haven't dropped as a percentage of sales.
The company's total equity turned negative last year for the first time in as long as I can find.
Campbell Soup recently cut its dividend by 30%.
Given our remaining fifteen-year time horizon, we believe that we can outperform Campbell Soup with another investment.
Our food and beverage investment money is now, and has been for 18 months, going to PepsiCo (NYSE: PEP) instead of Campbell.
Given all these important factors, the time has come to kiss Campbell good-bye. We're saying good-bye even though I enjoy the soup, even though free cash flow is at record highs, even though the company has about 70% market share for canned soup in North America, and even though Campbell is one of the most recognized brands in the country. Often, brand is not nearly enough. Even strong market share isn't enough to make for a consistently strong business.
Why did we wait this long?
Many Motley Fool Drip investors sold Campbell Soup as soon the company's Drip went from free to fee-laden. When your investing strategy calls for investing small sums of money regularly and commission free, any affront to that strategy -- such as new fees -- can be enough to alter your course with a company.
We maintained our position in Campbell for three years, however, hoping to eventually sell at a better price. That, or we hoped that management would finally find its groove and the company would consistently grow again. We didn't buy more stock due to the fees and faltering growth strategies, but we were prepared to let our existing position grow in value were that in the cards. (We further explained why we held in a post on one of the Drip discussion boards.)
Why sell now?
I feel that we've given the investment ample time at this point. Aggressive advertising, dozens of new soups, entering new markets, and cutting costs have helped Campbell stay profitable, but these initiatives haven't been enough to make Campbell grow earnings since 1998. (Free cash flow has grown, but debt has grown as much.) So, what will make the company consistently grow net earnings?
Maybe it won't, at least not consistently. Perhaps the market is just too mature, and without question the market is now more competitive.
Additionally, for investors who held on for the relatively healthy dividend, even that has been cut to size.
Still, given all this, our primary reason for selling Campbell Soup is that we believe we've found a better long-term food and beverage investment in PepsiCo, where the main attraction is Frito-Lay, and we believe that we've found a better long-term investment, period, in our new purchase announced today: Paychex (Nasdaq: PAYX).
Enrolling in Paychex's direct investment plan
Our high-growth investment study began more than one year ago and sure dragged on, eh? (That's us: Slow.) The company that rose to the top among 50 contenders was Paychex.
Paychex has a business that we believe we understand, and it has a long-term growth strategy that we believe is viable. So far, the strategy has worked for 30 years. In a nutshell, the strategy is: Grow payroll clients, add new human resource and payroll-related services, and grow sales of those services. Meanwhile, also earn net income on a growing "float," or money withheld before paying taxes.
Paychex traded at $31 when we considered its valuation in October. We concluded that at $31 the stock could prove a decent long-term value. Now the shares are $35. Given the slowdown in earnings growth this year, we'd like to see a lower price, but we're comfortable buying now because we will start slow.
Our buy decision is best summed up by not summing it up (aside from index funds, investment decisions can rarely be presented in neat little packages). Instead, our buy decision can be followed in this string of reports:
In the next month, we'll enroll in the company's direct investment plan, free of charge, by purchasing $250 of stock. Before we send that check, we'll go over the company's latest quarterly report, announced Wednesday morning, showing "just" 11% net income growth. After 14 interest rate cuts and record lay-offs for its clients, the worst news may be behind Paychex, but next year's growth will almost surely be considerably weaker than recent years. If so, a coinciding lower stock price would benefit us as we start to build a position.
So that's today: We announce our sixth buy and our first sell. We wish Campbell Soup the best. We find it unfortunate (as we did more than three years ago) that Campbell's dividend investment plan isn't friendly to small investors -- the average consumer, in other words -- but also, Campbell's business, including the balance sheet, is still going in the wrong direction. We happily welcome Paychex to the long-term Drip Port.