I read widely and often find investment wisdom in unexpected places. One of the most important things I've ever found was in a management book written by Arie de Geus called The Living Company. It is why, when selecting stocks for my portfolio, I have a decided preference for companies that have been around for a very long time -- often over 100 years.
Here's why...and why you might want to add this simple filter to your screening process, too.
Making a better company
Arie de Geus worked for Shell in what's best described as an internal think tank. His group looked at the world and created future scenarios in which the company might need to operate -- heady stuff, given the inherent uncertainty of the future. But Shell's management also tasked this group with a unique project: figuring out what separated companies that had existed for hundreds of years from those that didn't manage to last that long. This is the subject of The Living Company, a management book intended to help create companies that can stand the test of time.
Image source: Getty Images.
"The test of time" is the key phrase here, because the world changes greatly over time. What Arie de Geus found was that most companies only make it around 30 years or so before they get bought or merged away, or go out of business. It was, in fact, quite rare for a company to exist for 100 years or more.
The key, he proposes, is that the company must create a mindset in its employees that corporate survival is the most important thing. With this, employees will make the often difficult decisions that allow the company to adjust with the world. He dubbed such businesses "living companies."
That's great, but what does it have to do with investing? Everything, if you invert the story.
Old is beautiful
As an investor, I'm not actually looking to build a company; I'm looking to tag along for the ride as a company grows over time. One quick and easy way to find a company that has instilled Arie de Geus' "living company" ethos into its DNA is to simply look for one that's been in existence for a long time -- clearly, it's survived the test of time, since the only way to do so is to change and adapt. (Note that nothing is foolproof; just ask General Motors investors after GM's bankruptcy following the Great Recession). By doing this, I remove the need to hope and pray that I've picked a durable business: The evidence suggests that I probably have.
Some examples of stocks I own that fit this bill are Eaton Corp. (ETN 1.90%), Toronto-Dominion Bank (TD -0.42%), International Business Machines (IBM 1.05%), and Hormel Foods (HRL 1.31%). Notice the diversity in that list. If you're patient and picky, you can find really old companies in just about every industry that are worth buying when they're unloved by Wall Street. Indeed, even the best companies fall out of favor occasionally.
I bought industrial giant Eaton after a transformational merger that materially increased its exposure to electrical products. Investors were worried about the debt required to seal the deal. That said, Eaton was founded over 100 years ago as an auto-parts maker, and had long used acquisitions to drive growth and change as it shifted its focus to "power management." It now makes everything from vehicle transmissions to aviation products, with a huge number of electrical products in between (electrical products make up nearly 70% of sales). Debt isn't an issue anymore and the stock has risen sharply, pushing the yield from over 4% when I bought it to just 2%, with a few generous dividend bumps along the way.
Toronto-Dominion Bank (better known as TD Bank) hasn't experienced as much change over time, given the nature of the banking industry. But its banking business has existed for well over 150 years, going back to 1855. I bought the stock after the Great Recession, but its yield is historically high again today (around 4.2%) thanks to fears about a recession taking shape in 2023. Given the bank's history of surviving many, many recessions over the years, I'm confident that it will be able to muddle through yet another economic downturn.
I added IBM to my portfolio shortly after Warren Buffett sold it, as he feared it was facing too much competition. There is, indeed, a lot of competition in the technology sector. But IBM started life making scales, transitioned to making computers, shifted to services, and has now moved into the cloud (helped by its purchase of Red Hat). The last few years were very difficult as the company's revenue fell while it shed older lines of business, but it appears that it's finally started to turn a corner. Given IBM's long and successful history of shifting along with the tech sector, I was happy to collect its generous dividend (which yielded over 5% when I jumped in) while waiting for management to get the business mix right. The dividend yield, by the way, is still very attractive at around 4.6%, despite what appears to be a much improved revenue outlook.
A final example is Hormel Foods, which makes Spam. If that's not enough of a reason to buy the stock, then consider that the company has been around since 1891. Inflation is raging today, causing investors to worry about profit-margin contraction. There's also the avian flu, which is impacting Hormel's Jennie-O turkey products. Both are likely to be transitory issues and the food maker has definitely lived through very similar situations in the past. Wall Street doesn't seem to care, thinking only about the short term, and has pushed the stock lower and the dividend yield up to a historically high 2.4%.
Limit your mistakes
I tend to get very excited by interesting investing news, which leads me to make mistakes. Hot new products and fast growing young companies catch my eye and I think about striking it rich, even though my own investing history informs me that this isn't likely to happen. That's why I try to put roadblocks in my path, like focusing on very old dividend-paying companies, particularly when their yields are historically high.
Screening stocks for long histories doesn't guarantee me success; I still need to do additional homework. But it helps to focus me on companies that have proven they have what it takes to survive and, ultimately, reward investors as they change with the world. There are some very good options still available, like Hormel and TD Bank, if you know what you're looking for.
