Sunday, February 12

Week 32- Growing Perpetuity Index Performance for 2011

Situation: The past year was a chaotic one for stock-pickers. Loss of the highest S&P rating for long-term US Treasury bonds in combination with Congress’ near inability to raise the debt ceiling in time to avoid a default on those bonds resulted in a sharp drop in the S&P 500 Index in early August. For the year of 2011, the S&P 500 Index remained unchanged in terms of price appreciation (but don’t forget that the 2% payout in dividends brings the total return up to 2%).

Mission: It’s time for an accounting of 2011 performance for our
GPI (Growing Perpetuity Index - see Week 4). We’ll do number-crunching every January, so READ NO FURTHER IF NUMBERS AREN’T YOUR THING! Just know (here’s the “sub-basement bottom line” for you) that someone who invested in DRIP accounts for all 12 stocks in the GPI had a total return of 11% for 2011, and that growth estimates for the next 10 yrs also come in at a total return of 11%.

We think that’s awesome, and frankly, it’s the reason we’re writing this blog.

So let’s assume that one of our readers invested in each of the 12 GPI stocks beginning January 3, 2011, using a dividend re-investment plan (DRIP) and made an electronic purchase of $100 the first trading day of each month (see Table 1). The results by year end were pretty good with the GPI returning 11.9%. Only two stocks (MMM & UTX) turned out to be losers. Three stocks (XOM, WMT, and JNJ) were not only winners but receive props for both beating the S&P 500 Index over the past 2 yrs and showing low risk (see Week 25 -- Master List Risk). For comparison, we examined a similar $1200/mo virtual investment in a DRIP for our benchmark, SPY (the Exchange-Traded Fund that mimics the S&P 500 Index). It had a negative return (-0.49%) for 2011. So the time and trouble of DRIP investing paid off, for this year.

But what about future prospects for our reader who is running those 12 DRIPs - assuming she makes no additional investments and lets her current DRIPs ride? How big of a nest egg would accumulate over the next 10 yrs? To answer that question, we’ll use Warren Buffett’s method (Week 30) for projecting 10 yr total returns (see Table 2). His method begins by establishing which companies have grown tangible book value steadily for  the past ~10 yrs. Among the 12 GPI stocks, 6 meet this qualification (CVX, XOM, MCD, NSC, WMT, and NEE). Of the remaining 6 stocks (PG, KO, MMM, JNJ, IBM, and UTX), his company (Berkshire Hathaway) has large holdings of 4 (PG, KO, JNJ, and IBM). It’s safe to assume that Warren Buffett would not own those stocks without a good reason. Book value might have been impaired for a reason, such as a decision to leave offshore earnings overseas (Week 30). The remaining two companies (UTX & MMM) also have large offshore earnings. Taking Warren Buffett’s method for projecting future growth in gains that will be realized by investors, we find that an average rate of 11.08%/yr (over the next 10 yrs) is projected for the 12-stock GPI (see Table 2).

Bottom Line: By investing the sum of $100/mo in each of the 12 DRIPs included on the list of GPI stocks, a return of 11.91% would have been realized for 2011. This is to be compared to a loss of 0.49% for investing the same $1200/mo in SPY. AND using Warren Buffett’s method for projecting 10-yr total returns suggests that an 11%/yr growth rate is likely to continue.

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