This is going to be a long post.
Casaubon wrote:
All Tech and No Diversity Is Bad
In the 20-, 30-, or 40-year time frame of the 401(k), the all-tech-all-the-time portfolio might make you a fortune. And yet, if you had done the same exercise in 1970 with a view toward retiring now, your portfolio of tech blue chips included the following:
Digital Equipment, now part of underperforming Compaq (CPQ)
Sperry and Burroughs, which merged to form underperforming Unisys (UIS)
Fairchild (FA), Polaroid (PRD), Xerox (XRX)
Some true points. We can't overlook the power of discontinuous innovation in technology. Would savvy investors in technology overlook this over a 20, 30 or 40 year period to not diversify their holdings? Even if they did overlook it, what would the results be?
How long has the 401K program been available? It began in 1978, so the maximum age is 23 years had one taken advantage of it back then. I don't know the history well enough for 1978 to say that the first plans available all immediately allowed for individual stock purchase. Before 1978, the tradition was in a company sponsored pension plan and even continued for many years beyond that. That puts workers retiring today at age 65 having been age 42 in 1978. Chances are, those workers had some sort of pension or retirement benefits built up before 1978 came rolling along. So we would not be able to assume they were all tech unless they worked for those specific companies you mention and the plan was all company stock.
Although you didn't cite Compaq in your example, in terms of a Compaq employee, the stock began trading in 1983 at a split-adjusted price of $.37 a share. Of course, dividends have been distributed along the way since 1997. So employees holding their original shares until today's price of $18.20 have only seen a 4,819% increase in share price value. In other words, $10K in 1983 has grown to $481,900 thus far without the inclusion of dividends. Even if we ran through the prospects that an employee may have socked away $1K per year in Compaq shares from 1983 to present, their retirement prospects should be well in order.
compaq.com
What about Xerox? She's been around for a century in some shape or form. The company has paid quarterly dividends since 1948 (paid dividends before that on an annual basis since the 1936 public offering). The stock has split 9 times since 1923 and 7 times since going public in 1936. If we go with the 1961 NYSE listing as Xerox date, then the stock has split 4 times since then (5 for 1, 3 for 1, 3 for 1 and 2 for 1). One share in 1961 is now 90 shares. We'll leave out the previous 5 splits with the thoughts that company employees or investors that benefitted from those splits in 1923, 1928, 1936, 1955 and 1959 may not care too much any more at this point about the value. Not true for some of the 1955 and 1959 crowd, but you catch my drift.
If we use the closing price of the NYSE listing of Xerox on July 11, 1961 of $104, split-adjusted the price is $1.16. So employees or investors who had those shares and held for 40 years, have seen the share price increase 660% not including dividends. The dividends become very important to our return basis, but that information follows. In terms of strictly the share price $10K became $66K over 40 years. Not quite as impressive as Compaq from the early employees, but if employees had added shares each year through the company plan as well as saved the dividends paid each quarter along the way, at least they would have some kind of money built up for retirement. Maybe some of those employees and investors sold a portion of their shares at higher prices in the past ten years to help fund their retirements. Who knows, but we have to assume this would be natural in the retirement scenario? Regardless, how much did the dividends contribute along the way? A lot, of course. Very important to include this rather than only focusing on the share price appreciation because this is where the laws of compounding come into effect. I only know the dividends from 1965 to 1999. 1961 - 1964 and 2000 are 'unknown' to me and I don't have time to dig that information up. Regardless, the per share annual dividend totals up for those years to $13.07 per share.
1961 one share cost of $1.16 = How many dollars per original share in total dividends for each time period?
1963, that one share becomes 5 shares. $.23 per share between 1965 and 1968 = $1.15
1969 those 5 shares become 15 shares. $10.10 per share between 1969 and 1995 = $151.50
1996 those 15 shares become 45 shares. $1.94 per share between 1996 and 1998 = $87.30
1999 those 45 shares become 90 shares. $.80 per share in 1999 = $72
The current indicated annual dividend is $.20, but I have left 2000 and 2001 out of the calculation on purpose.
Total dividends for each original share acquired in 1961 = $311.95. Keep in mind that this is not exact as I didn't time the splits with the exact quarterly pay outs, but just went with the annual dividend year that the split took place. So the real results would differ a little bit, but the illustration remains the same. Regardless, the point is that employees and investors who had shares that were acquired in the 60's, 70's, 80's and 90's also received dividends along the way which need to be factored into the total return. How much do they have that were acquired between 1961 and to date in terms of shares? Who knows? It's quite possible that a lot of shares were acquired by some employees and investors.
Total of all dividend pay outs = $311.95 for each original share purchased or given in the employee benefit plan before 1965. Of course, that's only working from the 1961 base and doesn't include the possibility of some family trusts or foundations having owned shares in the 30 years prior to that. If we use the $1.16 July 11, 1961 split-adjusted price, then we need to add the dividend returns to the share price return of 660%. That doesn't include the 1961 - 1964 or year 2000/2001 dividends either. If we suppose that an employee or investor acquired 100 shares of stock in 1961 for around $10,400 and held - they now have 9000 shares to date. What would the accumulation of dividends on 100 shares have been? $115 + $15,150 + $8,730 + $7,200 = $31,195 in pre-tax dividends. 9000 shares have a current value of $79,380. Add the dividends and the total is $110,575. That's a return of around 963% since 1961 minus the missing dividends of 61-64 and 2000/2001. Then we would consider what the dividends were used for along the way. Were they reinvested in something else - either additional shares of Xerox or fixed income or CD's or nominal savings rates. Or perhaps to purchase shares of other companies to create a diversified portfolio. Did employees and investors only hold those early original shares, or did they add all along the way to build up their retirement nest egg over the 20, 30 or 40 years? All answers are possible. Point being that it is possible Xerox employees or investors that had all their eggs in one basket and continued to contribute to that same egg basket throughout the 60's, 70's, 80's and 90's have seen their nest egg grow to the point where it will fund their retirement in spite of the smack the stock price has taken in the past two years. What if an employee or investor had added 100 shares each year between 1961 and 1991? You just never know what the effects of compounding can do - especially when dividends are involved.
Xerox's .pdf of total return (includes reinvestment of dividends) between 12/30/91 and 2/29/01 is available here:
www2.xerox.com
It states that between those time periods, the return was 376%. The stock is up about 7.5% since the calculation was made in February of 2001, so the return is a little better. (That's including being down 70% in the past 52 weeks.)
All other information taken from:
www2.xerox.com
Here's the chart from 1971 to present:
bigcharts.com
We could go through all the historical implications of share price, dividends as well as the M&A activity to see what original shares would have been converted into so that we could determine what Polaroid, Digital, IBM, Sperry, Wang, Unisys, Fairchild and others yielded on a compounded basis to see just how bad or not so bad things turned out for those just now entering the retirement age after serving at those companies for decades or having invested in those companies for decades. Maybe their nest eggs are quite sound for their retirement needs and maybe they are not.
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