How to spot companies that can last a lifetime

Assessing the merits of the market’s oldest companies can enable us to see whether a particular set of qualities – be it steady management, adaptability or just simple luck – are the key ingredients of long-term success, and whether these qualities are also evident in companies that are less advanced in their corporate journeys.

Compiling a comprehensive list of companies with exceptional longevity, both privately owned and listed on the public markets, is relatively easy, but quantifying what makes them unique, or worth investing in, is a much more difficult exercise. What is clear is that how companies change and evolve over time can affect their investment potential, their function and even the basis of their operations. For instance, a modern investor in a company such as Pearson (PSON), which these days is a pure-play academic publisher, would hardly wish that it return to its roots as a builder’s merchant and construction material wholesaler in 19th century London.

What we need, therefore, is a checklist to refer to when assessing the best and worst of the market’s oldest companies, and this can start with what makes for a survivor company other than just sheer longevity.

Who are the true survivors?

There are plenty of examples of shares where, although appropriate corporate actions have ensured the company’s continued existence, the underlying investment case remains inactive. That makes buying shares in the rump of the business an exercise in producing dead capital. This can happen for several reasons, whether it is management mistakes – overloading the balance sheet with debt is a sure sign of ego getting in the way of sensible management – an external crisis creating stress, or opportunities not turning out to be as fruitful as first thought.

Capitalism at its heart is always going to be about change, and often violent change. As the doyen of the Austrian school of economics, Joseph Schumpeter, said: “Economic progress, in a capitalist society, means turmoil.” It is fair to say that Schumpeter’s short-lived tenure as finance minister of Austria in the aftermath of the first world war gave him an insight into what chaos looks like. In company terms, a sudden change in market conditions can have near-fatal consequences – and the history of the stock market in both the UK and US is littered with such examples, some of which do not end with the inevitable demise of the company itself, but rather lead to a strange state of limbo. This is the most obvious way of measuring the success of a survivor: merely to survive is not enough, it must also thrive afterwards. Knowing which companies are zombies and which are true survivors is the fundamental starting point: longevity itself doesn’t necessarily mean quality.

A less than Capita idea

The recent fortunes of De La Rue (DLAR), the banknote printer founded in 1821, are a salutary lesson in how survival does not necessarily equate to consistent returns. It is now trying to partly reinvent itself as a provider of authentication services, but other survivors have struggled while continuing to focus on core competencies. Capita (CPI) started as part of the not-for-profit organisation the Chartered Institute for Public Finance and Accountancy (CIPFA) in 1984, and grew under its founder Rod Arlidge to list on the Stock Exchange in 1991.

While times were good, Capita stepped up to run ever more of the moving parts in the UK state. Drivers’ licences, passports, government training, the fire service college, as well as offering support services to marquee names such as British Airways.

But the real problem with Capita, and with the outsourcers in general, was that generating new business at any price became the dominant model. This meant that the company piled up uneconomic and lossmaking contracts at a time when the government was striking a much harder bargain; margins were thin and even the smallest rise in costs could tip whole business divisions into losses. Matters came to a head in 2018 when the company issued a profit warning under a new chief executive, along with a dividend suspension, a pension deficit of £381mn and net debt of £1.15bn.

The turnaround since then has involved selling available assets to any buyer that can afford them. Around £1.7bn of debt has been paid back and the defined-contribution pension fund is now in surplus thanks to rising interest rates, combined with an agreed contribution plan in place since 2020.

So, if a company has survived against arguably all the odds, does it qualify for survivor-share status if it merely exists in a precarious present, rather than working towards a sustainable future? In Capita’s case, a business that produced £1.47bn of revenues in the first half of the year but which generated only £21.1mn from its operations looks trapped in a vicious circle of asset sales and underperforming contracts. Companies are not fated to die, but sometimes the market simply moves away from them.

A Rolls-Royce performance

Then again, markets can always change their minds. For much of the past decade, Rolls-Royce (RR.) struck a sour note with investors, struggling with profit warnings and contract mishaps of its own. Then came the pandemic, which was particularly painful for a company that once prided itself on above-average performance and a hard-won reputation for engineering excellence.

Without large numbers of flying planes, Rolls does not earn money from its servicing contracts, which are based on aircraft flying hours. Two years of subsequent reorganisational turmoil has only just started to ease as more passengers take to the skies and brave the passport queues. In January, its chief executive used the frightening image of a burning platform to describe Rolls-Royce’s predicament, but recent performance suggests the flames are being doused.

The company has of course been here before, and while there could have been a scenario over the past three years when its financial situation became unbearable, the theoretical possibility of going bust pales in comparison with the time that Rolls actually went bust in 1971 and was then nationalised by Ted Heath’s government and saw its motoring arm hived off two years later.

The key point to note regarding its latest pressure point is that, even at the worst points of the lockdown and travel ban, Rolls Royce’s balance sheet was still producing vital cash. This is confirmed by the fact that its current ratio – a measure of balance sheet health – never dipped below 1.1 during the entire episode; as long as the ratio stays above one, the balance sheet is producing cash. Admittedly, a major part of this was its ability to get a £1bn rights issue and £2bn of new bond issuance away at a time when even its own advisers were reportedly sceptical over the likely outcome. The cash infusion, combined with a programme of cost-cutting and redundancies, helped provide liquidity at a key point.

The fundamental difference between Rolls and a company such as Capita is that for the former the market believes that capital is still being efficiently deployed in a value-added activity such as complex mechanical engineering. A zombie company absorbs capital at a rate faster than its core activity can produce it, which certainly does not describe Rolls-Royce's situation. With its 118-year history, Rolls is a prime example of a survivor share on the UK market and one that is too important to the British export economy to simply fade away.

A lucky charm

Company loyalty is a quality that has been given a new lease of life in the wake of the pandemic, as firms cope with an unprecedented movement of employees able to pick and choose jobs and higher wages. For many HR departments, this prompted bouts of soul-searching over whether their businesses were doing enough to keep their staff happy beyond the monthly pay cheque. Start-ups and tech firms have long gone with the “free fruit and table football – don’t ask about the company pension scheme” approach to staff happiness but, until very recently at many firms, online mindfulness sessions and free cake were a rarity. If the success of any organisation is due, in part, to the productiveness and well-being of its staff, then survivor companies should logically inspire the kind of loyalty that leads to resilience and longevity.

Few companies like to publish statistics on their average retention rates on these shores, but over in the US, this has become routine for firms that want to attract and retain the best talent. One such company is General Mills (US: GIS), whose founding date of 1866 puts it in the upper tier of oldest-surviving US companies. For the uninitiated, General Mills makes some of America’s best-loved breakfast cereals and snacks, including Lucky Charms, Cheerios and Golden Grahams.

While the company has the now-standard ESG mission statement that emphasises investment in people, place and planet, in its case the statistics seem to back up its claims to nurture long-term relationships with its staff. Despite having 16,000 employees, the company has annual turnover of just 3 per cent. More than half the workforce has been in post for 10 years, or more, while 12 per cent have been there for more than 20 years.

So does this impressive display of retention and motivation translate easily into total shareholder returns? How hard-nosed are investors prepared to be? The answer may come as a surprise. According to FactSet data, General Mills’ total return has been respectable, with the shares rising in value by 70 per cent over the past five years. Over that timeframe, earnings grew by an average of 3.7 per cent annually, compared with an 11 per cent annual increase in the share price – when dividends are included (the company’s dividend yield is currently 3.3 per cent) the gap widens further. Indeed, the company has a long track record of delivering the goods for shareholders; the total annual return increases to 15 per cent when the timeframe pushes out to 20 years.

In short, General Mills seems to simply be well-liked and respected as a business: while earnings do not shoot the lights out, as a consumer staple it’s a company on which investors can rely in most economic conditions. And the dividend yield is, by US standards, not to be sniffed at. For value investors, the company’s 16 times forward price/earnings (PE) ratio, based on FactSet consensus, is a clear discount to the S&P 500 and to similarly long-lasting competitors such as Hershey (US:HSY) with its frankly inedible chocolate (although this may be a matter of subjective taste).

Keeping it in the family

Hershey – a business in which the founding family still retains majority voting power – brings to mind the old debate about whether older, family-owned companies are inherently better run than newer, less established ventures (‘Do Family Companies Make Better Investments?’ IC ,19 May 2023). Professor Vicki TenHaken, author of Lessons from Century Club Companies, has unearthed research from Japan that businesses aged 100 years or more are at least twice as profitable as the country average. Although similar research is not available for the US and other markets, TenHaken believes that there is no reason that a similar rule of thumb cannot apply.

But if the criteria are both age and an ongoing connection with the original founders, then investors should be wary. A good example of how family-owned businesses don’t necessarily make for harmonious business relations is the feud between the various branches of the Porsche family over the ultimate ownership of Volkswagen (DE:VOW) and Porsche (DE:P911) itself. This culminated in a spectacular corporate raid in 2008 when Porsche tried to assert control over VW through a series of complex share options, prompting a short squeeze on VW shares.

Some Investors’ Chronicle readers who were lucky enough at the time to hold Volkswagen stock made returns of several hundred per cent overnight. The attempt ultimately failed, with Porsche sustaining huge losses as its options turned bad on the back of the financial crisis. Currently, an uneasy compromise sees Volkswagen continue to hold a majority stake in Porsche, while the Porsche family does likewise in Volkswagen. One can only imagine the atmosphere at the family Christmas dinner.

Other family owners of successful companies are content to sit back and let the hired help run the business. For example, few people without specialist knowledge would guess that the Quandt family continues to own a key controlling stake in BMW (DE:BMW), with only one son, Stefan Quandt, holding a formal position at the carmarker as deputy chairman of the advisory board. Hardly the stuff of engaged management. BMW also fails the age test as, like many large German companies, it is the product of the country’s post-war economic miracle; in BMW’s case, being saved from bankruptcy through the intervention of old man Quandt in 1959. Instead, we must redefine the “family” origin of a business to come up with sensible stock-market-listed suggestions.

Family in name only

Sooner or later, Berkshire Hathaway was going to intrude into this debate – the company is technically an old family business with its roots in 1830s Rhode Island, although admittedly now unrecognisable from the cloth manufacturer that Warren Buffett first took over in the 1960s. But its holding company, whose cash pile recently topped a record $147bn (£116bn), is in corporate terms only in active middle age so has to be discounted from our calculations.

One company that does fit the age criteria and still retains some links with its founders is giant chemicals company DowDuPont (created out of a merger in 2017 but subsequently hived out again), or more specifically the DuPont de Nemours (US:DD) part of the company. Founded in 1802 by French/American chemist Éleuthère Irénée du Pont de Nemours, the company initially specialised in gunpowder production, after a fateful hunting trip showed up the poor quality of American gunpowder. The corporation started with $36,000 and a site on Brandywine Creek in Delaware.

The attraction of DuPont from an investor’s point of view is that its longevity reveals a basic fact about the nature of business. The company keeps going because it is exceptionally good at what it does. Having mastered the second phase of industrialisation, it lives on with the basic premise that modern society needs chemicals of all kinds and in all things, and that this is a superb generator of exclusive intellectual property. It is estimated that DuPont has 35,750 patents registered for the period between 2009 and 2018 alone. For reference, the largest patent holder in the world is the highly diversified Korean “Chaebol” corporation, Samsung, which filed more than 6,200 patents just in the US across the vast range of its sprawling operations.

It is also the case that the reshoring trend that is currently powering the biggest expansion of US manufacturing facilities in 50 years is benefiting the likes of DuPont. The Biden administration has made it a priority to manufacture more of the country’s critical chemicals, particularly those used in the manufacture of medicines, onshore. The idea is to reduce the reliance on overseas (for this read Chinese) supply chains that were badly exposed by the pandemic and the war in Ukraine. Arguably, DuPont’s resilience is down to the fact that the company's longevity regularly allows opportunities to come its way. In this case, it is less the family name that matters and rather the expertise and experience built up over decades.

It is fair to say that history matters when it comes to picking quality companies to invest in. Successful companies are rarely based on just one big idea, and spend several lifetimes researching, developing and refining their products so that the competition cannot easily eat away at the margins. Looking for focused and productive research and development, patient cultivation of market share and customer relationships, and even considering how well a company treats its workforce, could all unlock some potential long-term investment gems.

In Lessons from Century Club Companies, TenHaken writes: “The point is not that the old companies don’t see profits as important, but that they view them from a different perspective. Accomplishing their mission and purpose comes first. If a company does this well, they believe making money will follow.” Most investors would wholeheartedly agree with that sentiment, even if the approach can sometimes require patience stretching across decades.