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What You’ll Learn Today

• Key features and benefits of businesses with a consistent operating history.

• Warren Buffett seeks out companies with consistent operating histories.

• Why to avoid investing in companies that operate in transforming industries.

• Consistency creates better predictability of earnings power, supporting more effective investment analysis.

Consistency Generates the Best Returns!

A steady track record is a relatively reliable track record

INTRO

According to Warren Buffett, the very best returns are achieved by companies with a consistent operating history. He points to companies that have been producing the same quality product or service for several successful years.

And over the years, his investment portfolio has time and time again been made up of companies that fit that profile: Coca-Cola, Moody’s, Geico and American Express, among others.

Why Choose Companies with Consistent Business Operations?

A consistent operating history is one of the most crucial concepts in investing, as it highlights the significance of stability and reliability in a company's performance over time.

Warren Buffet is known for his value investing strategy, and a large part of his approach has emphasized the importance of this principle a lot. According to him, to maintain long-term investment success, the company needs to have a consistent operating history. When a company has demonstrated consistent results with the same type of products year after year, it is not unreasonable to assume that those results will continue.

This write-up presents the key attributes to look for in a company that is likely to generate above-average returns over the long-term. One of the most crucial attributes is to have a consistent operating history. This is a byproduct of a strong and reliable business model, complemented by a durable competitive advantage.

Over the long-term, the very best companies are able to leverage that durable competitive advantage in ways that generate above-average returns to enhance shareholder value.

Warren Buffet has always placed greater importance on companies with a consistent operating history because consistency brings stability, which is a crucial indicator of long-term success. It also creates better predictability of future earnings power.

Predicting the future success of any company is certainly not foolproof. However, a steady track record is a relatively reliable track record.

Consistency in business operations that produce outstanding results also reflect a regular and loyal customer base oftentimes supported by a strong brand. That brand resonates with consumers in a way that creates pricing power, affording the company freedom to raise pries and produce higher earnings.

These companies have the greatest potential for long-term economic growth, having a better ability to withstand inflationary pressures and market downturns.

Buffett Likes Companies That Avoid Major Business Changes

Warren Buffett also steers clear of companies that are aiming to solve difficult problems or transform industries.

The problem with transforming industries is that they seldom, if ever, establish any kind of durable competitive advantage due to the intense competition that exists at the early stages of any industry. And intense competition kills profits! New businesses, of course, also have no history of product durability or profitability.

Buffett advocates investing in companies that are well-established, profitable, and those that haven't changed their operational nature much over time. He believes that major operational changes lead to unexpected risks and challenges that can threaten the company's long-term success.

This philosophy has been the heart of his investment decisions. He looks for companies with reliable, consistent operations, and a low chance of major complications.

“Severe change and exceptional returns usually don’t mix.” -Warren Buffett

American Express Has a Consistent Business Model

When Buffett evaluates a stock for investment, he assesses more than just a current snapshot. He looks at the operating history of a company as a live and ongoing business, and he envisions the unique set of dynamics associated with it to drive its long-term potential.

An excellent example of Warren Buffet's investment strategy is highlighted by his investment in American Express.  In this company, Buffett saw the long-term value of American Express’s name when he first considered investing in it. It had a strong brand that resonated well among an elite customer base within a niche industry. And nowadays as it applies to their credit card segment, certain American Express credit cards are marketed and seen as aspirational status symbols.

At the time of Buffett’s initial investment, American Express held an 80% market share of the travelers check industry, and it had earned record profits in each of the past 10 years. It still maintains a reputation for serving a higher-class clientele, and American Express has long been demonstrated as a model of consistent operational excellence that has led to the generation robust free cash flows year in and year out.

Its product durability, with consistent offerings of premium credit cards and travel products, have helped the company to gain a competitive edge financially. The company brought in $32 billion in revenue in 2014. By 2023, that number had grown to $56.9 billion, a very healthy +78% increase over a 10-year period. Net income over the same period has grown from $5.9 billion to $9 billion, also reflecting healthy growth.

Similarly, its high and steady free cash flows help it reinvest in the business and increase shareholders' value by paying enough dividends and stock repurchases. American Express has been aggressively buying back shares at an average rate of 3.84% CAGR of outstanding shares. Between net income growth and share buybacks, net income per share increased by 8.67% CAGR.

Here is a company with no need for high levels of capital investment or infrastructure and no meaningful R&D (research and development) budget to take away from its profits. As such, it’s a very profitable company with plenty of potential upside for growth to this day. American Express’s ability to produce greater customer satisfaction and long-term success is derived from consistency and reliability with its product offerings and business operations. 

And as this visual below reflects, American Express has been able to consistently produce high levels of free cash flow by consistently producing these same high-quality products year after year.

Buffett has always opted for businesses with long-lasting competitive advantages, strong business models, and exemplary financial management. And within American Express, he found a company possessing these key attributes.

The company has maintained its performance and mitigated risks during economic downturns, and it has demonstrated ability to facilitate strong compounded growth. This is largely driven by consistently high levels of return on equity (ROE), which typically hovers around the 20% to 30% range (very good levels, indeed!).

Thus, American Express has successfully aligned with Warren Buffett's investment philosophy.

Other Examples

Coca-Cola

Coca-Cola has also proved to be a great example of Warren Buffet's investment philosophy. The consistency in product offerings and Coca-Cola's global brand strength have enabled the company to maintain its market dominance and generate high returns.

Coke has been a high-quality consumer staple for decades. It has an excellent track record with a steady and consistent return profile. In prior periods of economic duress, the company has outperformed the broader market due to its more defensive nature. 

Apart from its soft drink brands, the company is also engaged in the juice, water, coffee, tea, and ready-to-drink alcohol segments. But for the most part, Coca-Cola is largely still selling the same classic product it has been for years, experiencing significant growth and geographical reach over its long history.

The company has achieved a strong brand identity through strategic marketing, a large-scale logistics network, and a deep-rooted presence in cultures worldwide. It has achieved greater financial outcomes through consistent revenues and free cash flows.

Coca-Cola has also more recently been producing greater returns for shareholders through dividends and share repurchases.

Buffett initially poured $1 billion into Coca-Cola stock, and through dividends alone, he’s getting that billion-dollar investment back every 15 months! That’s some serious cash flow. More recently, Coca-Cola’s stock price has also improved +21.5% since crashing in the second half of 2023. This improvement is largely driven by Coca-Cola’s pricing power.

Ultimately, it was Coca-Cola’s timeless appeal, coupled with its impressive track record of success, that led Buffett to invest heavily in the company. Over the course of 131 years, the company has proven itself highly adept at navigating business growth and the international landscape.

Johnson & Johnson

Like American Express and Coca-Cola, Johnson & Johnson is a sound example of steady operations and a reliable business model. The company is known for producing consistent healthcare and consumer products, thus building resilience and reliability. These attributes indicate the company's alignment with Buffett's philosophy.  

The company has a diversified product portfolio consisting of pharmaceuticals, medical devices, and consumer healthcare products. J&J has continued to maintain consistency in the product's quality and reliability, more recently regaining momentum with strong growth in its Innovative Medicine and MedTech segments, driven by new products and strategic acquisitions.

J&J has achieved long-term success by acquiring companies that complement their existing products and competencies. The company's financial consistency is maintained by generating robust cash flows (currently with an excellent 22% levered FCF margin) year after year that have led to increasing shareholders' returns. This makes the company attractive to investors.

As a very mature company, a big part of its capital allocation is to pay a competitive dividend. J&J is considered “a dividend king,” and a lot of the investment appeal is based on J&J’s consistent and growing dividend payout, with shares currently providing for a healthy 3.02% dividend yield.

The company also has a healthy balance sheet with a low 58% total debt-to-equity ratio, so the dividend is not only growing but stable. As suggested in this write-up on Seeking Alpha, “The company’s robust financials, including a triple-A credit rating and significant cash reserves, position it well for sustained growth and reduced legal risks.”

Johnson & Johnson has hiked its dividend for 61 consecutive years. It has a payout ratio of 46% and a 5-year CAGR of 5.7%.

Thus, the company’s consistent operating history has generated economic resilience and a durable competitive edge to cope with the fluctuating market and economic downturns.

Conclusion

In conclusion, long-term investing success is surely derived from investing in companies that have steady operating histories - companies that are well-established enough to demonstrate at least a few years of economic excellence. 

Such companies hold leading market shares, being well-positioned as #1 or #2 within their respective industries, and financial performance consistently reflects above-average earnings and high levels of free cash flows.

Past results are certainly no guarantee of future performance. However, companies with a steady track record of strong earnings in the past tend to support the notion of a high likelihood of the same excellent results playing out in the future as well.

Coca-Cola, Johnson & Johnson, and American Express have presented great examples of Buffett's investment philosophy. While they have never presented as high-flying growth stocks like Nvidia (NVDA) or Novo Nordisk (NVO), there are similar such “boring” younger companies that present great long-term investment prospects. Sign up for RIIQ Pro to learn more about these prospects. They have established consistent business models and strong brand identities, while demonstrating economic resilience over the long-term within challenging situations.

As an investor, seeking to invest in a company with a consistent operating history affords better predictability of earnings and greater likelihood of excellent, compounded returns over the long-term.

Investors must be patient in transforming their vision to long-term success instead of making abrupt decisions in sudden downfalls. With a long-term vision, the magic of compounding will afford remarkable returns from such companies. 

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP.

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