Monday, April 01, 2019

Conglomerate busting...

Ten years of equity market growth have carried most major U.S. conglomerates along steadily if not spectacularly.  In the last year or so, some have not fared so well, and a few of those are well known.  Most notable was GE, an example of gross mismanagement and leadership arrogance.  The latest has been Kraft Heinz, caught without a swimsuit when the tide went out.  Most, however, have fared well enough given expectations of conservative investors, but not up to a market level performance.

As an example, check out 3M, that's MMM stock symbol.  Good ole scotch tape, but so many other things.  There are four divisions:  safety and industrial, transportation and electronics, healthcare, and consumer.  Below these are several hundred products and brands.  The dividend yield is currently 2.7% and the stock price is up 5.3% over the last year, versus 9.5% for the S&P 500.

MMM's top ten mutual fund holders are all index funds, usual suspects but rarely is there a clean sweep.  Who loves MMM?  The largest institutional holder is State Farm Mutual, an insurance company in the Chicago area, makes sense for them one could guess.  Up in the leave us alone state of Minnesota all may be well, but over time every great company needs to compete for capital and just as importantly, if not more so, talent.

Other conglomerates such as Johnson & Johnson, Honeywell, United Technologies, Comcast, Disney, Lockheed Martin, Dow Chemical, and many others work within a specific industry group but own multiple companies.  What a conglomerate is in technology is still being figured out.  Is Alphabet a conglomerate?  Probably, but please explain. Elsewhere, is Berkshire Hathaway a conglomerate?  Not really, as it is uniquely more like a mutual fund that owns independent companies for the long term.

So what is this comment about.  The coming phase in financial markets will be breaking up these huge companies into freestanding independent ones with their own stock, their own compensation systems tailored to their unique businesses and not tethered to "the blob" of a massive company.  That's key. Conglomerates with managements that are open to this concept could be exceptional long term investments.

All things being equal, identifying those managements that are willing to giving up size and power in return for higher shareholder returns is an investor's job now.  Up in the 3M territory folks might not like to hear that, but the next Carl Icahns will eventually find you up in the North Country fair. 

There is no new or original thought in this post, just an opinion about the timing of using it.

On a completely different subject, LYFT would be a buy here in the mid to high 50's, otherwise pass.


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