Daily Gains Letter

Another Old Economy Company Soars on the Stock Market

By for Daily Gains Letter | Feb 19, 2013

DL_Feb_19_2013_MitchellAnother great company is dropping out of the stock market. News that H. J. Heinz Company (NYSE/HNZ) has been bought out by Warren Buffett and a partner firm is more conformation of just how well old economy stocks are doing in this market.

H. J. Heinz has been a great long-term performer on the stock market, and I consider it to be old economy in the sense that it’s a traditional brick-and-mortar business, selling essential products that consumers use every day.

Now Buffett has another cash-generating machine on his hands. On the day that he announced he was buying the company, H. J. Heinz was yielding 3.4%. On the stock market, H. J. Heinz hasn’t done a lot over the last dozen years or so; but if you eliminate the price spikes, it’s been smooth sailing for the last 20 years. The company’s five-year stock chart is below:


Chart courtesy of www.StockCharts.com

There are a lot of boring businesses out there that make a lot of money, both operationally and on the stock market. Old economy stocks are back—and they’re back with fervor, because we’re in a slow growth environment. When there’s little growth, institutional investors will pay for consistency and dividends; right now, the stock market is rewarding these attributes.

Countless old economy names are doing great on the stock market at this time, even though the main stock market averages are treading water. This doesn’t mean, however, that they are good buys at this particular time; only that they would be worth looking at on major price retreats.

Two old economy stocks that are worth considering when they’re down are Colgate-Palmolive Company (NYSE/CL) and The Procter & Gamble Company (NYSE/PG). These are two of the stock market’s best consumer products companies and each has a strong track record of wealth creation for stockholders.

They both offer dividend reinvestment and, when combined with their excellent records of price appreciation on the stock market, they can build quite a little nest egg for investors over time.

The key to making money with old economy stocks is increasing dividends. This is how large businesses that are very mature and slower-growing create real wealth for shareholders. With those increasing dividends, shareholders would be a lot less inclined to stick around.

Like I say, countless old economy names have been doing well on the stock market for the last several years and it’s a trend with staying power. We are in the age of austerity, whether we like it or not. Government spending is not sustainable and global capital markets are starting to rebel against all this sovereign debt.

As a stock market investor, I would be perusing old economy names in anticipation of a buying opportunity in the next major correction. After Buffett announced that he was buying H. J. Heinz, he said that he still has the problem of too much cash coming in that needs to be put to work. Of course, most of this excess cash comes from his insurance businesses and dividends from the old economy companies he owns. The fact of the matter is that buying good businesses that pay increasing dividends is a strategy that really works.

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