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Warren Buffett bought into Gillette just as it was about to get the benefit from years of R&D spend. This newsletter describes the period after Buffett bought in. It also looks at why Buffett held shares in Gillette after they had more than doubled.
The Sensor
In October 1989 the Sensor razor was unveiled, offering thinner twin blades individually mounted on springs allowing a closer shave due to continuous adjustment to the contours of the face. It was an instant hit. So successful was it that the company suspended advertising for a while so that the production team could catch up.
So, despite costing almost $200m to develop over 13 years, followed by $100m for advertising, it made a mint for Gillette. Factories produced around the clock seven days a week. Within two years the one-billionth blade cartridge was sold.
Gillette’s profits after tax went from $285m in 1989 to $368m in 1990 to $427m in 1991; and were headed for a whopping $513m in 1992.
Common stock
The common stock rocketed, and the board insisted that Berkshire’s preferreds be converted into 12m common shares on April 1 1991. Given that these shares had a market value of over $1.3bn, and being a participant in the profits of a company on a fast growth trajectory, Buffett and Munger were quite content to switch to the common stock.
Sadly, in January 1991, Colman Mockler died of a heart attack aged 61. In his 1990 letter to shareholders Buffett paid this tribute,
“No description better fitted Colman than “gentleman” – a word signifying integrity, courage and modesty. Couple these qualities with the humor and exceptional business ability that Colman possessed and you can understand why I thought it an undiluted pleasure to work with him and why I, and all others who knew him, will miss Colman so much.
“A few days before Colman died, Gillette was richly praised in a Forbes cover story. Its theme was simple: The company’s success in shaving products has come not from marketing savvy (though it exhibits that talent repeatedly) but has instead resulted from its devotion to quality. This mind-set has caused it to consistently focus its energies on coming up with something better, even though its existing products already ranked as the class of the field. In so depicting Gillette, Forbes in fact painted a portrait of Colman.”
Why did Buffett hold on to Gillette’s common stock?
After conversion of the preferred shares into 12m common stock in 1991 Berkshire could have sold for over £1.3bn, more than double the original investment less than two years previously. So why didn’t Buffett cash-in his chips at that point?
Presumably he thought through the likely owner earnings over the next decade and beyond. After that, he estimated, probably in his head without a piece of paper in sight, the present value of the future annual owner earnings to arrive at a rough estimate of intrinsic value. The factors informing this estimate are qualitative and far from precise. They are based of judgements about matters such as the sustainability of the strength of brands in the minds of people in various countries; in the competence of the managerial team, and; in the likelihood of the directors acting in shareholders best interest.
We do not know what numbers Buffett came up with in 1991. What we can do, however, is look at the dividends actually paid to Berkshire over the following ten years. And we can look at Berkshire’s share of Gilllette’s undistributed earnings – see table. Perhaps Buffett had in mind numbers similar to these? If so, his 1991-self would have judged that it won’t be many years until Berkshire’s dividends plus its share of retained earnings in Gillette amounted to more than $100m for a typical year (we can’t automatically use the numbers in the table as perfect representations of owner earnings because some of the retained earnings might be swallowed up by large capital expenditures or extra investment in working capital to maintain the com
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