The Company when It's Old (3): Why you might invest in these?

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

There are several reasons you might do this. 

• First, big companies are less risky, in that they generally are in no danger of going out of business.
• Second, they are likely to pay dividend.
• Third, they have valuable assets that might be sold off at a profit.

These corporate codgers have been everywhere and seen it all, and they've picked up all sorts of valuable property along the way.  In fact, studying an old company and delving into its finances can be as exciting as rummaging through the attic of a rich and elderly aunt.  You never know what amazing stuff you'll find stuck in a dark corner.

Whether it's land, buildings, equipment, the stocks and bonds they keep in the bank, or the smaller companies they've acquired along the way, old companies have a substantial "break-up value."  Shareholders act like the relatives of that aged rich aunt, waiting to find out who will get what.

There's always the chance an old company can turn itself around, as Xerox and American Express have been doing in the past couple of years.

On the other hand, when an old company falters or stumbles as badly as these companies did, it may take 20 or 30 years before it can get itself back on track.  Patience is a virtue, but it's not well rewarded when you own stock in a company that's past its prime.

The Company when It's Old (2): Alcoa, GM & IBM

There's a lesson here that may save you some grief in the future.  No matter how powerful it may be today, a company won't stay on top forever.  Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.

Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.

International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar.  Johns-Manville, once number one in insulation and building supplies, topped out in 1971. 

The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.

General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years.  Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable.  Sometime in the 1960s, its reflexes began to slow.

The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas.  The attack was aimed directly at Detroit and GM was slow to react.  A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.

It continued to make big cars when it could see that small foreign cars were selling like crazy.  Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories.  This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.

For three decades the largest industrial company in the US has not been largely profitable.  Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you.  People would sooner have believed that Elvis was lip-synching.

Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline.  Since the early 1950s, IBM was a spectacular performer and a great stock to own.  It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle.  The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations.  As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.

The stock was recommended by stockbrokers everywhere as the bluest of the blue chips.  To mutual fund managers, IBM was a "must" investment.  You had to be a maverick not to own IBM.

But the same thing happened to IBM that happened to GM.  Investors were so impressed with its past performance that they did not notice what was going on in the present.  People stopped buying the big mainframe computers that wer the core of IBM;s business.  The mainframe market wasn't growing anymore.  IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product.  IBM's earnings sank, and as you probably can guess by now, so did the stock price.

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

The Company when It's Old (1): Woolworth & US Steel

Companies that are 20, 30, 50 years old have put their best years behind them. 

You can't blame them for getting tired.  They'd done it all and seen it all, and there's hardly a place they can go that they haven't already been.

Take Woolworth.  It's been around for more than 100 years - several generations of Americans grew up shopping at Woolworth's.  At one point, there was a Woolworth's outlet in every city and town in America.  That's when the company ran out of room to grow.

Recently, Woolworth has suffered a couple of unprofitable years.  It can still make a profit, but it will never be the spectacular performer it was when it was younger.  Old companies that were great earners in the past can't be expected to keep up the momentum.  A few of them have - Wrigley's, Coca-Cola, Emerson Electric, and McDonald's come to mind.  But these are exceptions.

US Steel, General Motors, and IBM are 3 prime examples of former champions whose most exciting days are behind them - although IBM and GM are having a rebound.  US Steel was once an incredible hulk, the first billion-dollar company on earth.  Railroads needed steel, cars needed steel, skyscrapers needed steel, and US Steel provided 60% of it.  At the turn of this century, no company dominated its industry the way US Steel dominated steel, and no stock was as popular as US Steel stock. It was the most actively traded issue on Wall Street.

When a magazine wanted to illustrate America's power and glory, it ran a picture of a steel mill, with the fire in the furnaces and the liquid metal poureing like hot lava into the waiting molds.  We are a nation of factories then, and a good deal of our wealth and power came from the mill towns of the East and the Midwest.

The steel business was a fantastic business to be in, and US Steel prospered through both world wars and six different presidents.  The stock hit an all-time high of $108 7/8 in August 1950.

This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would ahve been the perfect time for investors to sell their US Steel shares and buy shares in IBM.  But you had to be very farsighted and unsentimental investor to realize this.  After all, US Steel was classed as a blue chip, Wall Street's term of endearment for pretigious companies that are expected to excel forever.  Hardly anyone would have predicted that in 1995, US Steel stock would be selling for less than it sold for in 1959.

To put this decline in perspective, the DJIA was bumping up against the 500 level in 1959, and it's gone up more than 4000 points since.  So while stocks in the Dow have increased in value more than 8 times over, US Steel has gone downhill.  Loyal shareholders have died and gone to heaven waiting for US Steel to reclaim its lost glory.