We Do Not Like Pessimism, But We Do Like The Prices It Produces

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As the world emerges from the two-year shadow of the COVID-19 pandemic, Mr. Market has turned pessimistic. In 2022, the stock market has pulled back from record heights due to serious inflation and geopolitical concerns with Russia’s invasion of Ukraine.

At the same time, our high quality companies continue to generate strong cash flows which enable them to reward us with growing dividends, substantial share repurchase programs, and acquisitions to drive future long-term growth.

Notable acquisitions announced during the past quarter included Microsoft’s (MSFTplan to acquire Activision Blizzard (ATVI) for $68.7 billion in cash, Oracle’s (ORCLplanned purchase of Cerner (CERN) for $28.3 billion, and Intel’s plan to buy Tower Semiconductor (TSEM) for $5.4 billion.

Most of our high-quality companies have provided steady dividend increases over the decades despite numerous wars, conflicts, inflationary periods, panics, recessions, and the recent global pandemic. This includes 3M (MMM)  which has paid dividends for more than 100 years without interruption (see p. 12).

The past three months have provided a spring shower of additional dividend increases which have our pockets jingling. Genuine Parts’ (GPCdividend motored 10% higher for the 66th consecutive year. Hormel (HRLincreased its dividend by 6%, marking 56 Spam-tastic straight years of dividend boosts. Brown-Forman (BF-Bincreased its dividend a cheery 5%, marking the 38th consecutive year of dividend increases, while also adding to the mix a special $1 per share dividend.

T. Rowe Price (TROWincreased its dividend an inflation-beating 11%, marking the 36th consecutive year of dividend increases. Roche Holdings (RHHBY) increased its dividend by 2%, which was the 35th consecutive year of dividend hikes. Canadian National Railway’s (CNI) dividend chugged 19% higher—tracking higher for the 26th straight year.

Other dividend increases announced during the quarter included a historic 49% dividend airlift by United Parcel Service (UPS), a 12% increase by Cognizant (CTSH), an 11% jump by Fastenal (FAST), a healthy 10% increase by Stryker (SYK), and a 5% chip shot by Intel (INTL).

Not to be outdone, several of our high quality companies announced both dividend increases and share repurchase program expansions during the quarter thanks to strong cash flows. For example, Tractor Supply (TSCO) sprinkled Miracle Gro on its dividend and increased it 77% while plowing up a new $2 billion share buyback program. Cisco (CSCOincreased its dividend by 3% and announced a new $15 billion share repurchase program. Mastercard (MAincreased its dividend by 11% while expanding the buyback program by $8 billion. The TJX Companies (TJX) increased its dividend by a dressy 13% and expanded the buyback to $3 billion.

PepsiCo (PEPpopped its sweet dividend 7% higher, representing the 50th straight year of dividend increases while announcing a $10 billion share buyback program. SEI Investments (SEIC) increased its dividend by 8% and expanded the share buy- back program by $200 million. Visa’s (Vdividend was charged 17% higher as the company expanded its share buyback program by $12 billion.

If long-term investors focus on the steady increases in the cash flows and dividends of their high-quality companies, then market volatility becomes less worrisome and simply provides an opportunity to buy stocks if they become mispriced. This is happening now given the fear and uncertainty surrounding geopolitical events. While we do not like pessimism, we do like the prices it produces. Many of our high quality companies have returned to our buying range thanks to the lower stock prices and higher intrinsic values of the underlying businesses. As the global economy fully reopens from the pandemic, we believe our businesses are well-positioned to create continuing long-term shareholder value. With inflation eating a big hole in the purchasing power of cash, long term investors should consider high quality stocks with growing cash flows instead.

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