Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 574

Warren Buffett's sweetest investment

Experienced investors do not seek danger, but they may accept uncertainty in exchange for growth potential. Technology companies illustrate the principle. Most fall by the wayside, but the ones that live to dominate their rivals can create large fortunes by adding boatloads of new customers. The more buyers feeding the top line, the fatter the bottom line.

Not every company succeeds through expansion, though. There are other ways for businesses to enrich their shareholders. A prime example is See’s Candies, owned by Berkshire Hathaway BRK. A. Despite increasing its customer base only glacially, it has been a hugely successful investment.

Background

Berkshire Hathaway’s 2007 shareholder letter provides the essential details. In 1972, the company paid $25 million to buy the privately held confectioner. That year, See’s sold 16 million pounds of candy, generating $30 million in revenues and “less than $5 million in pretax earnings.” (Another source is more specific, citing a $4.0 million pretax profit, which I used for my analysis.) Thirty-five years later, its unit volume was 31 million pounds.

At 1.9%, the company’s annualized growth of candy production barely exceeded the rise in US population. Had See’s reinvested each year’s profits back into its business and adjusted both its candy prices and costs to match the prevailing inflation rate, 1.9% would have been its annual real return. All the company’s profit growth would have come from selling more pounds.

Obliging customers

Fortunately for Berkshire Hathaway shareholders, See’s raised its prices by more than the inflation rate. Charlie Munger once stated, “Over time we just discovered that we could raise prices by 10% a year and nobody cared.” He exaggerated. If See’s management had tracked inflation for the first decade after its acquisition, then hiked its prices by 10% annually since 1982, a single pound of See’s candy would now cost $274. It does not.

See’s did enough. From 1972 through 2007, it increased its prices by 0.8 percentage point per year above inflation—5.5% for its sweets, as opposed to 4.7% for the Consumer Price Index. That doesn’t seem like much. However, thanks to the twin magics of compounding and operating leverage, that modest annual raise doubled the company’s profit margin. As the firm’s unit sales had also doubled, its real pretax earnings quadrupled.

3 forecasts for See’s Candies

A further consideration before considering the performance of See’s Candies is valuation. Berkshire Hathaway paid 6.25 times pretax earnings for a business that became more profitable than anybody expected. In addition, corporate tax rates declined over that period, thereby boosting the worth of pretax earnings. Consequently, See’s would have commanded a much higher price multiple in 2007 than it did when purchased. I estimate a ratio of 16 times.

Let’s assemble this information. The chart below compares three projections for the ongoing market value of See’s Candies to the total return of the S&P 500, over the period from 1972 through 2007. The forecasts consist of 1) unit growth, 2) profit growth, and 3) a full corporate assessment, which includes the effect of its higher price/earnings multiple, per my assessment.

My guess is that you’re not terribly impressed. On its operational results alone, See’s Candies could not keep up with the S&P 500. Admittedly, Warren Buffett bought the business at a discount, so if he had sold it he would have been slightly ahead of the pack. However, this analysis does not justify my statement that turtles could run like hares. Above average is not the same as excellent.

But remember the initial assumption that See’s reinvested its profits back into the business? It was almost entirely false. The quiet part of the See’s story—and it’s the very best part—is that its operations required almost no outlays. (Such can be the benefit of sluggish unit growth.) From 1972 through 2007, See’s Candies generated $1.35 billion in pretax profits but spent a mere $32 million on capital improvements.

See’s Candies: with dividends

In Berkshire Hathaway’s case, that excess cash went into the corporation’s coffers. Had See’s been a public company, those moneys would have either been distributed as dividends or squandered. Given how well See’s is managed, let’s assume dividends. We must now therefore include them to make a fair performance comparison, since the S&P 500's total returns (as with all indexes) account for dividends.

And the dividends would have been large indeed! In 1972, after funding its modest capital allocation and paying its far greater tax bill (that year’s corporate tax rate was 48%), See’s would have had $1.95 million available to distribute, making for a 7.8% annual yield. A sweet deal.

This time, I present two versions for the putative stock market performance of See’s. The relevant comparison is with its dividend payouts redistributed into the stock market—which, as stated above, is how the S&P 500's returns are calculated. (I thought about reinvesting the dividends into See’s itself, but that was one hypothetical step too far.) A more conservative approach is to assume that the dividends generate no further profit because they are immediately spent.

Below are the results for each method. Once again, all results are presented in 1972 dollars.

This time, I can convincingly claim victory. By my accounting, if See’s Candies had been a publicly traded company, an investor who bought its shares in 1972 and held for the next 35 years while reinvesting the company’s copious dividends back into the stock market, would have turned a $10,000 initial investment into more than $387,000 after adjusting for the effect of inflation. That means $1.9 million in nominal terms.

Conclusion

This isn’t ancient history. Since 2007, See’s Candies has boosted its margins more aggressively, by raising its prices by an annualized 5.5%, while inflation has averaged 2.5%. For more than half a century, the company’s essential story has been unchanged. Year by year, See’s earns more from its existing customers while throwing off oodles of excess cash. Those moneys can be invested elsewhere. See’s does not need them.

This article, of course, only offers a hint of the many factors that separate winning from losing investments. Besides top-line growth, pricing policies, and capital requirements, which we discussed today, other major considerations include cost containment, acquisitions, and share dilution. But I hope to have illustrated a broader point: Great stocks need not be growth companies, as the term traditionally is defined.

 

John Rekenthaler has been researching the fund industry since 1988. He is a columnist for Morningstar.com and a member of Morningstar's Investment Research Department. The opinions expressed here are the author's. The author owns shares in one or more of the companies mentioned in this article. This article is general information and does not consider the circumstances of any investor. Originally published by Morningstar and edited slightly to suit an Australian audience.


Try Morningstar Premium for free


 

RELATED ARTICLES

What Warren Buffett isn’t saying speaks volumes

The two best ways to maximise dividend income

Warren Buffett changes his mind at age 93

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.