Before I say anything in this week’s column I intend to apologise for an overdose of big, number heavy tables.
This deluge of tables is prompted by a fascinating article from a few years back. It was first published by CNN in 2015 and it looked at what was the most successful stock over the 53 years between 1968 and 2015.
According to the rather breathless article, ‘One dollar invested in this company in 1968 was worth $6,638 yesterday (including dividends). That’s an annual return of 20.6% per year for nearly half a century.’
It went on to say: ‘No other company comes close to matching its long-term results, according to Wharton professor Jeremy Siegel. The same dollar invested in the S&P 500 over the same period would be worth $87, or 98% less.’
So, what was the business? The answer was Altria, the cigarette company. And Altria is just the tip of the iceberg. The same CNN story cites Credit Suisse research which at the time suggested that one dollar invested in tobacco stocks in 1900 was worth $6.3 million by 2010. That’s 165 times greater than the average industry. You can read the whole story here.
I mention this article because I have recently been thinking through what success might look like in an environmental, social and governance (ESG) led future. In ESG land, tobacco stocks are a big no-no but there’s strong evidence to suggest that actually over the last few decades ‘sin’ stocks have consistently outperformed.
This might prove a challenge for ESG-oriented funds although its equally obvious that ESG might also change the future, by starving ‘sin’ stocks of more capital to grow.
The best UK stocks over decades
My own instinct is to defer to radical uncertainty and admit that I haven’t got the faintest clue. But this exercise in digging around in datasets did prompt me to wonder what the best UK stocks over the last few decades had been.
Unfortunately, my access to comprehensive, detailed total returns data for extended periods of time – 38 years – is incredibly limited. Apps such as www.sharepad.co.uk do have tools that allow you to look back say 25 years through the lens of total returns, share price growth plus accumulated dividends.
Now, at this point one must issue the usual caveats and say that these screens depend on the reliability of the underlying datasets which I can’t verify, so please treat all that follows with a huge amount of caution.
But does this data scraping reveal anything interesting about say the ESG paradigm or perhaps more pertinently what I call the persistency challenge? This latter concept is the notion that solid, impressive, well-run businesses continue to outperform their peers because ‘efficient’ markets continue to reward them and their managers with extra capital and solid share price growth.
So, having set out the challenges, now to the results, preliminary and tentative as they are. I have three tables of returns, one for 25 years, another for 20 years and the last for 15 years, this latter one being the least useful in my view.
The 25 years timeframe is the most interesting, not least because it captures an interesting handful of popular funds.
My screen for searching through the UK market does have an important cut off – I’ve deliberately only targeted businesses with a market value of over £500m in today’s money.
The results are fascinating.
Let’s focus on the 25-year numbers. The winner, using Sharepad’s data, is Kingspan (KGP), followed by Victoria (VCP), Ashtead (AHT) and Jet2 (JET2). All of these business I suspect might find themselves fairly challenged in an ESG world.
The top performing UK shares over 25 years (click table to enlarge)
There’s also the obvious comment that they are all fairly boring, Jet2, formerly Dart Group, excepted. In fact, as I look down the list of top stocks, its all pretty mundane stuff with other terrifically unsexy outfits such as Homeserve (HSV), Games Workshop (GAW) and Renew Holdings (RNWH).
But these exercises are always open to data cherry-picking. Maybe I picked a starting point 25 years ago that was particularly flattering to the businesses in the shortlist, so I’ve also included the 20 and 15-year observation periods.
The top performing UK shares over 20 years (click table to enlarge)
As you would expect the composition of the lists changed, but not quite as dramatically as I expected. In the three tables I’ve put in italics the companies that keep popping up in these total return lists – outfits such as Diploma (DPLM), Ashtead, Victoria, Renew Holdings, Antofagasta (ANTO)and Kingspan.
Another interesting question is whether you might expect businesses that have produced massive historic returns – every single business in these lists has produced more than a 1,000% return – to maybe be at peak valuations with poor fundamentals. But this doesn’t seem to be the case.
Take the 25-year cohort with an average market cap £5.3bn. Their long-term cyclically adjusted price-to-earnings ratio (Cape) is just under 40 times, while their backwards looking price-to-earnings ratio is 30 times. The average dividend yield is a respectable 1.7% and the forecast growth in said dividend yield is estimated to be 28.5%. Overall, the average price/earnings growth ratio is a very healthy 2.65.
The top performing UK shares over 15 years (click table to enlarge)
Obviously, we need to take all these numbers with a mountain-sized pinch of salt, but I think a key insight is that although these businesses have produced stellar results, their valuations aren’t crazy and their fundamentals still look fairly robust. Put simply, there is strong evidence for persistence of business outperformance. If the persistence factor is still significant, then I would suggest that the recent underperformance of Cranswick, Homeserve and James Halstead might possibly present an opportunity.
All four have produced total returns over 25 years of over 2,200%. In my view the return on Hg Capital is arguably the most impressive as the other three funds have ridden the technology boom in the US, whereas Hg has produced impressive returns from a much more difficult to manage, European private equity strategy, which admittedly is fairly tech heavy!
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