“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2015, and take a look at what happened to investors who asked that very question about Lilly (Eli) & Co (NYSE: LLY), by taking a look at the investment outcome over a five year holding period.
| Start date: | 04/01/2015 |
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| End date: | 03/31/2020 | ||||
| Start price/share: | $71.53 | ||||
| End price/share: | $138.72 | ||||
| Starting shares: | 139.80 | ||||
| Ending shares: | 158.21 | ||||
| Dividends reinvested/share: | $11.19 | ||||
| Total return: | 119.46% | ||||
| Average annual return: | 17.01% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $21,943.29 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 17.01%. This would have turned a $10K investment made 5 years ago into $21,943.29 today (as of 03/31/2020). On a total return basis, that’s a result of 119.46% (something to think about: how might LLY shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Lilly (Eli) & Co paid investors a total of $11.19/share in dividends over the 5 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 2.96/share, we calculate that LLY has a current yield of approximately 2.13%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.96 against the original $71.53/share purchase price. This works out to a yield on cost of 2.98%.
One more piece of investment wisdom to leave you with:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman
