Type Quincy, Florida into your search engine and unsurprisingly the first page that pops up will be the standard Wikipedia entry that many towns across the developed world now have. When you run through it, Quincy probably won’t strike you as a particularly special town. It looks nice enough, but with a population of just under 7,000 people it seems, on the face of it, to look just like any other small town dotted across the American South.
But this town has a fascinating backstory, one that is summed up in a few lines if you make it right to the bottom of that Wikipedia entry. Quincy has made many of its residents rich, all due to one of the most recognizable brands in the world – Coca-Cola (KO). The tale of Quincy’s secret millionaires has actually cropped up a few times, but it’s such a great example of the power of compounding in a high quality company that it’s worth revisiting.
I’ve actually read a couple of variations of the Quincy story, but they both revolve around a local banker during the 1920s by the name of Mark Welch Munroe, commonly known as Pat Munroe. At this time Coca-Cola had been public for just a few years – it IPO’d in 1919 at $40 a share – but the stock had dipped due to a legal case with the company’s bottlers. This was then followed by a collapse in world sugar prices that left Coke holding contracts worth millions of dollars for overpriced sugar.
According to one version of this story, Quincy’s tobacco farmers hit a record crop haul around this time and were persuaded by Mr. Munroe to invest the windfall into Coke shares. They held onto these shares, never selling, and the rest is history. According to this version, which dates back to an article from 1997, the current holding would now total 15 million shares once you account for the many stock splits over the years, with a total value of $690 million.
Other versions merely state that Munroe would tell his customers to buy the stock, and such was his strong belief in the strength of the underlying business he would lend money to depositors so that they were able to do so. Quincy’s residents kept buying and never sold a share, and Coca-Cola dividends went on to protect the entire town through the Great Depression. Dozens of millionaires were created in Quincy and at one point it even became the richest town per-capita in the entire United States, all thanks to holding shares in one of the best businesses known to mankind. In later years Coke dividends would once again go on to protect many of the town’s residents during localized recessions and depressions.
So what could have made those Quincy residents so confident with their Coca-Cola holdings? In 1929 – the year of the Wall Street Crash – Coca-Cola had managed to earn just over $10 per share in net income. During the onslaught of the Great Depression the company’s earnings were hit but remained largely intact. By 1933, despite the worst financial crisis in modern history, it was still able to earn well over $8 a share and generate almost 20% returns on equity.
This was an economic environment that was ravaging stocks left, right and centre. Unemployment had exploded whilst corporate earnings were collapsing. Deflation was rampant. Yet The Coca-Cola Company kept on chugging along. A dividend payment of $4.90 a share in 1929 had even increased four years later to $6.00 a share. How many stocks can boast a record of increasing their dividends during the depression years? I’d wager not all that many.
Once you adjust for stock splits the value of a single Coke share bought back in the 1919 IPO is now over $10,000,000 (including reinvested dividends). Even if you assume that dividends were not continually reinvested, that single share would be worth over $400,000 based on today’s share price. Due to the numerous stock splits over the years that single share would have morphed into 9,200 shares, and would be churning out over $3,000 in dividend cash every quarter.
For any generous Quincy residents who handed these shares down to their heirs (and their heirs after that), it represents astonishing passive income. Even more so when you consider that this is all just from one single share. Had they initially picked up 50 shares in 1919 and held on to them then their descendants would currently be enjoying $150,000 a quarter in dividend income. Assuming the dividends were reinvested then the lump sum alone would be worth half a billion dollars before the effect of inheritance taxes come into play!
The competitive advantages of Coke are nearly impossible to erase; it would take an astonishing turn of events to destroy what has been built up over the past century. Coke stock dropped to 8x earnings during the worst years of the Great Depression. Its earnings had taken a 20% hit but they never once made a loss during the worst crisis in modern economic history. Nowadays, the market has long since cottoned on to the strength and durability of Coca-Cola’s earnings. It’s why it barely dropped to 16x earnings in the midst of the global financial crisis of 2007-2009 (though still a cheap enough valuation to ensure very healthy forward returns going forward).
As long as the underlying metrics of the business remained intact, and the company was continuing to enjoy enormous levels of profitability relative to the underlying tangible capital, the Quincy residents never had any reason to sell the stock other than for personal reasons. It’s a perfect example of the effects of value, quality profits and the compounding effects of long periods of time to create vast sums of wealth.