“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a twenty year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into The Gap Inc (NYSE: GPS)? Today, we examine the outcome of a twenty year investment into the stock back in 1999.
| Start date: | 11/19/1999 |
|
|||
| End date: | 11/18/2019 | ||||
| Start price/share: | $37.56 | ||||
| End price/share: | $17.30 | ||||
| Starting shares: | 266.22 | ||||
| Ending shares: | 390.39 | ||||
| Dividends reinvested/share: | $9.38 | ||||
| Total return: | -32.46% | ||||
| Average annual return: | -1.94% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $6,756.85 | ||||
As shown above, the twenty year investment result worked out poorly, with an annualized rate of return of -1.94%. This would have turned a $10K investment made 20 years ago into $6,756.85 today (as of 11/18/2019). On a total return basis, that’s a result of -32.46% (something to think about: how might GPS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that The Gap Inc paid investors a total of $9.38/share in dividends over the 20 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).
Based upon the most recent annualized dividend rate of .97/share, we calculate that GPS has a current yield of approximately 5.61%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .97 against the original $37.56/share purchase price. This works out to a yield on cost of 14.94%.
More investment wisdom to ponder:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
