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Last week, chewing gum powerhouse William Wrigley Jr. Co. made a major announcement — it was being acquired by privately-held Mars Inc. Even more interesting: Warren Buffett’s Berkshire Hathaway would be financing the deal.
I was elated by the news, especially because I’ve been highlighting Wrigley in my Dividend Superstars special report “Seven Stocks to Triple Your Income over Time.” Heck, as soon as the buyout news hit the wires, the shares rocketed toward the offer price. Take a look at my chart and you’ll see what I mean.
Since the initial release of that report, Wrigley’s stock is up 33.7% (including reinvested dividends). Not bad for a conservative stock that has been doling out regular (and increasing) dividend checks since the 1920s! And even better when you look at what the S&P 500 has done over the same period — from June 4 of last year through yesterday, the broad stock index posted a total return of –7%.
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But even if you missed out on the Wrigley action, don’t worry. Today, I’m going to tell you about three important lessons from this transaction. I think they’ll help point you toward other stocks with great profit potential. Let’s start with a little background …
Juicy Profits: Wrigley’s Chewing
Gum Takes the World by Storm
In 1891, William Wrigley Jr. moved to Chicago to sell soap. Shortly thereafter, he switched to selling baking powder, and to get shop owners to buy, he offered two packages of chewing gum with every can of powder. Apparently, the gum was a lot more popular than the powder — within two years, Wrigley was selling his now-famous Spearmint and Juicy Fruit gums. By 1919, Wrigley was a very rich man, and the sole owner of the Chicago Cubs baseball team.
Fast forward to today: Wrigley has become the world’s largest gum company, with about 40% of the global market. You no longer have to go to Chicago to get your gum fix — the company’s products are now sold in more than 180 countries. And despite all that expansion, the Wrigley family has remained intimately involved in the company. They control about two-thirds of WWY’s supervoting B shares, and Bill Wrigley Jr. is the fourth consecutive family member to run the company, first serving as CEO and more recently as executive chairman.
It might sound crazy to have an entire empire stuck together with chewing gum, but Wrigley is a cash machine. In 2007, the company sold about $5.4 BILLION worth of gum and candy. That brings me to the first thing you can learn from the Wrigley acquisition …
Lesson #1. When it comes to stocks, look for big brand names, solid product lines, and a global reach.
A lot of investors overlook one simple fact: When you buy a stock, you’re not buying a lottery ticket … you’re buying a stake in a business. If you can’t understand the business, you probably shouldn’t invest. And if you wouldn’t want to own the business for any length of time, you definitely shouldn’t invest in it!
Stop and think about what kind of businesses you’d want to own. Ones that have yet to turn a profit? Ones that sell products nobody’s ever heard of? Ones that cater to a specific group of people in one little part of the United States? No way!
Sure, select bets on up-and-coming companies can pay off handsomely. But they shouldn’t make up the bulk of your portfolio. And they are certainly not good bets during tough economic times when only the strong survive!
You can see why I advocate investing in companies that already sell terrific (and terrifically popular!) items around the world … companies that are easy to understand … companies that have strong brands … and companies that consistently share their profits with shareholders through dividend payments.
On all counts, Wrigley fits the bill.
But don’t take my word for it. Just listen to what Buffett said on CNBC’s Squawk Box show shortly after the Wrigley deal was announced. When asked if his investment was a “recession-proof play,” he responded,
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| Warren Buffett favors big brands and profitable products. I think you should, too! |
“Yeah. Both companies have great brands. When I talk to classes of university students, for a dozen years or more I’ve used Wrigley as an example … I haven’t known about Mars except that they’re a private company. But there is really nothing that can go wrong with something like the Wrigley or the Mars brands. It’s literally true that they have, ah, faced the test of time over decades and decades and people use more and more of their products every day.”
There you have it, straight from the mouth of the world’s greatest investor — brands and solid products are the true test of a business’ value. Speaking of Buffett, his participation in this deal leads me to …
Lesson #2. Even in this lousy credit environment, there are still big deals being done.
Will lousy, never-turned-a-profit businesses suddenly be acquired at huge premiums? Of course not. The “dumb money” is long gone. Even legitimate businesses are having a hard time getting financing right now. However, there is still plenty of smart money out there looking for good buys. Profitable businesses selling at attractive prices will always be hot. And savvy investors will always be willing — and able — to buy them lock, stock, and barrel.
Let me give you another quote from Buffett’s interview on CNBC:
“Well, I think a good time to buy a really great business is when you can do it. Many, many years ago, as I remember, Herman Lay offered the Frito-Lay company to Coca-Cola. And he offered them the company first, as I understand it, and they decided for one reason or another they didn’t want to do it then. And of course Pepsico bought it and it’s the best thing they ever did. So if you get a chance to buy a wonderful business, then my advice is, grab it.”
No doubt the markets are rocky right now. But in my book, that means there are plenty of opportunities out there. You’ve just got to use common sense and form your own investment opinions. You can’t be afraid to jump in when everyone else is running for the exits.
Then you just have to wait for the market to come around to your way of thinking …
Lesson #3. When it comes to investing, patience and conviction are rewarded.
Take another look at that chart of Wrigley. As you can see, the stock bounced around within a range for quite a while.
I know it’s hard to sit around watching your investments do nothing. Everyone wants that ten-bagger that will make them the star of the cocktail party.
But as I’ve said before, investing is about steady returns over time. Taking a longer-term approach lets you ride out the market’s bumps, and positions you for the big, sudden gains. As the Wrigley deal proves, a huge up move can come out of nowhere. If you tried to trade in and out of the shares, you likely would have missed that HUGE one-day pop!
So if you believe in a stock, and nothing has fundamentally changed, stick to your guns! Especially if that stock is paying you to wait through steady dividend checks.
Remember how everyone used to laugh at Buffett during the dotcom days? I sure do. He was made to look like a fool, someone who’d completely lost touch. And here he is, a few years later, looking like a genius yet again.
Bottom Line: The Wrigley Deal Proves that Conservative,
Dividend-Paying Firms Will Never Go Out of Style!
Investment fads come and go. And if your timing is good, you can make a heck of a lot of money riding those trends. I have nothing against using some speculative funds to chase big gains.
However, I also recognize the timeless investment principles that will never change … the very same principles espoused by guys like Warren Buffett. In my opinion, those are the strategies you should use for the bulk of your portfolio.
That’s why I love companies like Wrigley so much. To the untrained eye, they look like boring old junk. But to those in the know, they’re more like valuable antiques — classics that have stood the test of time, and will steadily increase in value over time. And hey, you’ll still get plenty of excitement every time one of those regular dividend checks hits your mailbox!
Best wishes,
Nilus
P.S. Wrigley is just one of the many time-tested, dividend-paying companies profiled in my series of special reports. To learn how you can get all of those picks for free, click here now.
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