Conglomerate Stocks: The Great Depression Success of American Home Products
Last Friday was the 75th anniversary of the repeal of Prohibition. It seems we can’t escape looking back over our shoulders at the 1930s.
We teeter closer to the sequel no one wants to see: Great Depression II. We got horrible news on the job front last week. Unemployment climbed to 6.7% as the nation lost another half a million jobs in the month of November alone. It was the worst rack of numbers in 34 years. One in 10 American mortgages is now either behind on its payments or in foreclosure.
Businesses are cutting back. Consumers are cutting back. Commodity prices have collapsed. The stock market is down more than 40% this year. When we close out the books for 2008, you’ll have to go back to the 1930s to find a comparable disaster for stocks in a single year.
So I find myself looking back at the 1930s often these days. What survived and what did not? The story of American Home Products is worth a quick look, as it offers one idea of what did make it — and winded up doing pretty well.
American Home Products was an anomaly in American business. Started in 1926 by a group of businessman long since forgotten, AHP was a maker of household products. It started out as a true small cap and grew quickly through acquisitions. Nothing so unusual about the tale so far. After all, the second great merger boom in American business took place in the 1920s. The period gave us many names we still know — including General Motors.
But AHP was unusual in two respects. First, it continued its acquisition spree through the Great Depression when everyone else was battening down the hatches. It could do this because its finances were top-notch and its earnings power robust. Ben Graham, that great old investment writer from long ago, gave AHP a mention in his 1940 edition of Security Analysis. He gives us an appendix with the stock prices, earnings and dividends of AHP from 1929-1939.
AHP was not immune to the Great Depression, whose effects linger on its financial record. But the stock never came close to reporting a loss. Peak earnings of $5.49 per share in 1929 fell to $3.93 in the depths of 1932. It recovered by ‘39, turning in $5.23 per share.
Investors who held it through the Great Depression did all right. The stock price bounced all over the place, as you would expect. It hit a high of $86 in 1929 and a low of $25 in 1932. But by the late 1930s, it was still humming along in the $50s and would hit $60 per share in 1939.
All the while, it paid its investors nice dividends — a total of $34.35 over the decade. Considering what happened to the rest of market, and keeping in mind the dollar held its value better then, you would’ve been happy to park some money in AHP that decade.
There is a second trait that marks AHP as an anomaly: It bought businesses in unrelated industries. It owned firms in floor wax, coffee, oil, cheese products, insecticides and much more. It was the early model of a conglomerate. In this, AHP defied the wisdom of the times, which consolidated related business. It was the age of General Motors and General Foods and International Harvester. Big empires built in one industry. But perhaps AHP’s diverse platform helped it weather the Depression better than if it had only a floor wax business.
So here we have a model of survival in the worst of times. AHP was a well-financed business that did more than one thing. It was an opportunistic business in the best sense of the term. It bought firms when and where they were cheap, without regard to the lines that divide industries.
Well, maybe the conglomerates of today will also fare better in today’s harsh climate. We own quite a few of these kinds of businesses in our Capital & Crisis portfolio. You can join my readers and check out these stocks while they can still be had on the cheap.
Until next time,
December 9, 2008
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