Today I’m going to reveal how ordinary investors such as YOU could have enjoyed a gigantic 1,778% return from one of the market’s most surprising growth investments.
I use the word ‘surprising’, as this share and its performance may astonish some Fools new to the stock market.
And in a minute I’ll disclose the identity of the company concerned.
Forget ARM, Asos and Coke
But first, let me just confirm today’s Collective is not going to be dedicated to an obscure penny share, a blue-sky biotech or a random resources punt…
…the types of shares that often promise immense returns but almost always end up losing you most of your capital.
Nor am I going to bang on about ‘obvious’ growth names such as ARM Holdings, Capita or Asos…
…the success of which in booming industries such as microchips, government outsourcing and online fashion has been documented many, many times down the years.
And nor am I going to highlight legendary growth names from the States, such as Coca-Cola, McDonald’s or Wal-Mart,
…which have the advantage of a huge domestic market to propel profits higher and lay the foundations for even greater worldwide success.
No, instead I am going to showcase one of the greatest – and certainly one of the most startling – British blue-chip performances of the last decade or so.
All hail British American Tobacco (LSE: BATS) (NYSE: BTI.US).
Look at these blue lines and just imagine the amazing wealth created
I admit, I showed you the other week the colossal capital gains that could have been collected from BAT, alongside the immense profits from Next and Reckitt Benckiser.
But I thought those gains were so astonishing from BAT that I have repeated its share-price chart today (in dark blue, below), as well as including a new, total return line for the tobacco group (in light blue).
Anyway, take a good look at this chart and – for a few seconds – just savour the amazing wealth BAT has created for ordinary shareholders:
Source: Capital IQ
Essentially, you could have made 847% from the share-price gain alone – or an incredible 1,778% had you reinvested all of your dividends along the way – between the end of 1999 and now.
And all that from simply buying and holding a well-known FTSE 100 stock.
In the meantime, the FTSE 100 index is down about 6% excluding dividends and up just 50% with dividends reinvested.
The chart is, I feel, the one everybody dreams of.
It is a picture of beauty, showing the blue lines relentlessly climbing higher with two savage bear markets barely registering on the way.
This company ‘in decline’ has raised its dividend from 22p to 138p
Of course, what makes the enormous returns from BAT so surprising is the fact the tobacco industry is in structural decline in the UK and many other developed nations.
In fact, the percentage of this country’s population that smokes has halved during the last forty years…
…while rising tobacco duty, smoking bans, threats of plain packaging – and, of course, the obvious health dangers – aren’t ever going to help turn the tide back towards cigarettes.
And yet…
…BAT has forged ahead despite all the threats, pressures and worries about the industry going ex-growth. This table summarises the financial performance:
| 12 months to | December 1999 | June 2013 |
|---|---|---|
| Revenue (£m) | £9,072m | £15,310m |
| Pre-tax profit (£m) | £1,616m | £5,971m |
| Earnings per share (p) | 45p | 180p |
| Dividend per share (p) | 22p | 138p |
Source: Capital IQ
To cut a long and successful story short, putting up prices, buying rivals, expanding into new countries – as well as constant cost cutting – has pushed BAT’s pre-tax profits up nearly four-fold since 1999.
What’s more, brand-loyal customers, no new competition plus low capital requirements have ensured BAT’s cash flow has been immense…
…and allowed more than £6 billion to be spent on share buybacks…
…as well as helped lift the dividend more than six-fold since 1999.
A 150% return from dividends alone
And it’s that superb dividend that has been doing wonders for those shareholders canny enough to have alighted on BAT all those years ago.
In fact, BAT shareholders have collected nearly £9 per share in dividends alone during the last 13 years… equivalent to 150% of the share price at the end of 1999.
Astounding as it may seem, back in early 2000 you could have even snapped up BAT’s stock on a yield of 7% or more.
These days the share’s income is around 4%, as the market has gradually cottoned on to the group’s all-round reliability and ability to lift its payout during these tough times.
This seven-point combination could lead you to the next 1,778% gain
Sure, I recognise for many people that the tobacco sector is not a favoured industry on ethical grounds.
Of course, that’s fine by me.
But I am convinced BAT is a textbook example of why you do not have to look for sexy growth sectors for life-changing stock-market returns from ordinary shares.
Instead, this simple seven-point checklist of:
- A defensive sector;
- Predictable customers;
- Powerful brands;
- Resilient cash flow;
- Strong dividend advances;
- An undervalued share price, emphasised by a high yield, and;
- A basic long-term Fool investment strategy of buy, hold, keep holding, reinvest dividend, hold, keep holding, reinvest dividend, hold…
…may be all that you need to pinpoint the next 1,778% return from a blue-chip stalwart.
Certainly, it is that sort of vast return that encourages me – and the team at Motley Fool Share Advisor – to study mature, steady and so-called ‘ex-growth’ companies in our quest to track down tomorrow’s greatest investment winners on your behalf.
> Maynard does not own any share mentioned.
