(WAG) did not outperform the S&P 500, inflation and taxes.
Table Four: Final Six Lowest Performing Dividend Aristocrats
Only 3 of our final 6 of 51 Dividend Aristocrats failed to outperform the S&P 500 since December 31, 1999. Technically, none of these final six would have outstripped inflation or taxes either. However, only two of the six would have actually generated a real loss, excluding inflation and taxes. However, the reasons why are fascinating, and are reviewed in detail following the table.
Wal-Mart Stores Inc. (WMT)
Our next to last worst-performing Dividend Aristocrat was Wal-Mart, which tells a very interesting story about stock market inefficiency. Clearly, the company was significantly overvalued at the beginning of calendar year 2000. However, the reader should also note that this company grew earnings at above-average rates through both the recession of 2001 and the great recession of 2008. It was an inefficient stock market, not poor operating results, or even weak economies, that hurt the performance of this company.
Even though Wal-Mart's earnings growth averaged better than 11% per annum since calendar year 2000, the shares were not able to overcome the headwinds of excessive overvaluation. Consequently, shareholders lost money, but not because the company was poorly managed or because the economy went through two recessions. Shareholders lost money because Mr. Market overpriced their shares in a very inefficient manner during the irrational exuberant period which ended in calendar year 2000.
Pitney Bowes Inc. (PBI)
Our worst-performing Dividend Aristocrat, Pitney Bowes, is one of the few Dividend Aristocrats that actually experienced an earnings drop-off since calendar year 2000. However, all of it occurred since the great recession of 2008. Therefore, this company had two strikes going against it. Strike one, was massive overvaluation at the beginning of the timeframe, and strike two, falling earnings since the great recession.
However, in spite of falling earnings, Pitney Bowes managed to raise their dividends every year since calendar year 2000. Nevertheless, shareholders lost a considerable portion of their initial investment even when dividends are added in. But most importantly, Pitney Bowes' problems were all company specific, rather than a function of a bad market.
Summary and Conclusions
There are numerous lessons that I believe can be learned by a careful analysis of the above tables and individual earnings and price correlated company specific F.A.S.T. Graphs™. First of all, it should be recognized that Dividend Aristocrats, almost by definition, are above-average quality operating enterprises. A company cannot increase its dividend every year for 25 or more years without having a good operating history that includes strong balance sheets, and healthy earnings and cash flow generation. Second, the results that these quality companies produced validate my thesis that it is more appropriate to think of a market of individual stocks in contrast to a stock market.
But perhaps one of the most important lessons of all is the validation of the benefits of taking an optimistic view of stocks. Business cycles, which include recessions and sometimes unforeseen catastrophic events such as 911 should be expected. However, we should all realize that so far none has ever been severe enough to completely destroy our economy. And, God forbid, if one ever does, there is absolutely nothing anyone could do to protect themselves anyway. As I like to say, you can't manage portfolios based on Armageddon. Therefore, I strongly believe that the optimistic approach is the superior and most profitable one to take.
Volatility can only hurt you if you react to it. And you should not react to it unless there is a real fundamental deterioration with the fundamentals of the businesses you own. If fundamentals are strong and price falls, then buy more if you can, or hold if you can't buy more. Note that as three of the four specific examples that were cited in this article illustrate, the very best companies can remain profitable even during our most severe economic challenges. Consequently, when you can find these companies on sale, regardless of what caused it, I believe you should consider optimistically investing in them. It sure beats taking losses that you don't need to absorb.
Disclosure: Long CLX, VFC, WAG, MKC, BCR, ADP, MDT, T, XOM, MCD, KO, PG, GPC, KMB, ITW, MHP, SYY, CL, JNJ, AFL, ABT, PEP at the time of writing.
Disclaimer:The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.