I was fortunate to have invested in Hindustan Unilever (HUL) in 1995. One of my first investment in stocks. I’ll walk you through what the power of compounding can do for your savings and investments, with time and patience thrown in to supercharge the returns.
HUL is one of the largest consumer packaged goods (CPG) companies in India. It is a subsidiary of the Anglo-Dutch Global Fortune 500 company Unilever based out of UK & Netherlands.
India: HUL
UK / Netherlands: Unilever PLC and Unilever NV
I bought HUL shares in 1995, and hold them even today in 2018. That is a holding period of 23 years, and still counting. As you know, there are two ways to earn returns when investing in stocks, namely Capital Gains and Dividends. Thus,
Total Return = Capital Gains + Dividends
Dividends: HUL has been a dividend paying company since I have bought the shares, and even well before that. I will not be calculating the dividend in the below Power of Compounding demonstration, but you understand that the dividend only adds to the return that I have accumulated so far in Capital Gains and will continue to do so in the coming years.
Capital Gains from 1995 to 2018:
Cost of HUL share in 1995: INR (Indian Rupees) 68.50 per share
Price of HUL share on 18Aug2018: INR 1,784.75 per share
CAGR of HUL share from 1995 till Aug2018: 15.23% per year for 23 years
CAGR = compound annual growth rate or average return per year for a certain period of time.
My total capital gains on HUL shares over the 23 years has been … are you sitting down … 2,505.47%. Nope, you’re not reading it incorrectly, its more than 2,500 percent in total! Shocked? I’m blown away, just like you :).
The dividends that I have been getting for 23 years are like getting cherries on the cake every year. If the dividends are reinvested, then they further supercharge your returns by the Power of Compounding.
Capital Gains from 1995 to 2013 – What could have happened:
Unilever, the parent company, wanted to gain further ownership in HUL from about 51% to 75% and so in 2013 it offered to buy back shares at INR 600 per share. I was a firm believer that HUL was a good stock to hold for the long term, even longer than 18 years, which is what it would have been if I had sold it in 2013. Also, I was fortunate that I didn’t need the money. And, I didn’t think INR 600 was a fair value for HUL’s potential. But, say I had sold back to Unilever in 2013 at INR 600 per share. The CAGR I would have got after 18 years would have been only 12.81% per year, nearly 3.5% less per year for 18 years.
Just the additional 5 years of holding has spiked the Capital Gains more than 3 fold (3.22 times to be more precise), from INR 531.50 (600 – 68.50) to INR 1716.25 (1784.75 – 68.50)! Time and Patience = Sweet Returns 🙂.
Of course, being an equity, the above is paper profit, and subject to change with market gyrations. But, that is the risk you take with any stock investment, isn’t it? ?
Temptation to Sell or Fear of Holding
Even in the depths of the Financial Crisis of 2008, I did not consider selling my HUL stock. Again, I was fortunate not to need the money, nor was I fearful of losing money in the long term. Any drop in price during that crisis or many others that have come and gone, as long as I didn’t sell, the loss was on paper only and not real. Only if I sold the stock, I would have converted paper loss into reality.
And, even during the Financial Crisis, HUL paid dividends! In 2008, HUL paid total dividend of 650% of face value, which is INR 1, and in 2009 it paid a dividend of 700% of face value. Thus, in 2008 I received INR 6.50 for every 1 share I held, and INR 7.00 for every share I held. Isn’t that amazing.
When the prices are high, there is a temptation to sell, but unless you need the money or you have an even better investment that you can roll the money into, I would suggest you hold onto your investment and let it accumulate wealth for you. There is something called the opportunity cost that you end up paying if you sell when the price is high, and then your money is sitting in the bank earning low interest (lower than what you could have made in the stock if you had just held on; sometimes half of the above 15+% capital gains I earned) while you search for an investment of similar quality, safety or risk profile, expected returns, and growth in value over time. My thought is why sell an investment that is doing so well; you don’t jump off a winning horse unless you have to, would you?
Tax Treatment of Capital Gains and Dividends in India:
Capital Gains tax in India before 2018 was 0% (zero percent), and starting 2018 its 10% of the increase in value from 01-Feb-2018. On the other hand, Interest earned in bank accounts and Fixed Deposits / Certificate of Deposits, is taxed at your marginal tax rate. Thus, your opportunity cost of money sitting in the bank or a time deposit while you search for a superior or equivalent investment than you sold off continues to eat away at the returns you already earned when you sold off the stock. When you finally need the money and thus sell off your stock holding, at that moment you can calculate the final CAGR that you received for the entire holding period (the period of time when you invested in the first stock, sold it off, waited / searched for your next investment while earning low bank interest, and invested in this next investment, and finally sold it for the money). I am certain your final CAGR for that sum of money over the total investment period will be less than what you would have earned if you had just held onto your original investment. Remember also that you will pay transaction costs and any applicable capital gains tax when you buy and sell stock, which will lower your return even further.
Dividends in India are not taxed in the hands of the shareholder. Thus, dividends are tax-free in India. You keep all of your money, and I’m all for that :)!
On Transaction Costs:
By the way, I had bought my HUL stock from a friend in a personal transaction, and thus have never paid any transaction cost for the shares I bought. Also, even if I had paid a transaction cost, it would matter less and less the longer you hold the stock. If the transaction cost was 1% of the price, then I would have paid INR 0.685 for each share, which seems inconsequential after holding the share for 23 years and earning a return of INR 1716.25 in Capital Gains, and tax free dividends for 23 years. Wouldn’t you say so?
Final Thought:
Just so that you know, I bought HUL when its share was selling at a high price of INR 68.50. But, if you plan to hold for a long time, and if the company you invest in is a good one, then the Power of Compounding is bound to give you a good return if you have the patience to let it grow over time.
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