Very Long Term Equity Returns
The case of the Bazacle company
A key component in deciding to invest is the understanding on what sort of returns you can expect from your investment, and while past performance is no guarantee of future results, it certainly is a whole lot better than nothing!
So why don’t we go back almost 700 years to see a company that was started in the middle ages, and existed all the way up to the end of the second World War, and see what sort of returns its owners received throughout that period.
The Bazacle Company
First things first, the data and information I’ll be discussing here comes from this research paper published in the Journal of Financial Economics.
The paper was written by David le Bris, William Goetzmann and Sebastien Pouget, and based on the corporate records kept in the city of Toulouse since the firms foundation in 1372 all the way to its nationalization in 1946.
If you’re interested in the topic, I seriously reccomend you take a look at the paper!
What was the Bazacle Company?
The company named “Honor del Bazacle” was created in Toulouse, France in 1372 to operate watermills. Shares of the company were owned and regularly traded by individuals and institutions over the course of its history.
Following its conversion to a hydroelectric generating company in 1888, the company listed on the Paris stock exchange and traded there until its nationalization in 1946.
The company was (and still is) located on the right bank of the Garonne river near a natural ford used since antiquity.
This location has hosted mills since at least 1071, and by 1248 at least 12 mills operated in this location.
These mill companies merged in 1372 to form the Honor del Bazacle, with the owners of those existing mills receiving shares in the company based on an agreed upon valuation of the underlying 12 firms that onstituted the company.
The firm was private, for profit and operated by a dedicated management team with investors not being required to take on an active part in the management of the business beyond casting their votes in the yearly election of the board of directors.
By the mid 16th century, the governance and management structure of the Honor del Bazacle included a chief operating officer, a treasurer, and a clerk. This basic structure continued into the 19th century and up to modern times.
The firm was unusual for modern investors, since by and large it did not retain any earnings and instead distributed them directly to shareholders on a yearly basis.
This has certain benefits, but also multiple drawbacks, the chief of which is the requirement to provide capital to the firm when required (such as for repairs or expansion), which meant that on some years the effective dividend was negative (since investors were required to provide the capital, or see their shares forfeit and auctioned to provide said capital).
The Underlying Business
The underlying business was fairly simple to understand, and can be classified in the following ways:
A fee of 1/16th of the grain brought to the mill for milling
Leasing of secondary, unoccupied milling spaces
Leasing of Fishing rights to the Bazacle section of the river
These revenues covered most of the operating expenses, with any remaining operational deficits being covered by shareholders who generally paid their contribution in specie.
As a general rule the company distributed the fee charged on the grain to shareholders throughout the year on a periodic basis.
In 1888 the company converted its operations to a hydroelectricity generation company and became a Societe Anonyme in 1910, at which point its shares were traded in both the Toulouse and the Paris stock exchange.
This re-organization and refocus of its operations into the electric utility market, though a financially sound decision at the time, would eventually prove fatal once the French government decided to nationalize the entire electric utility sector, demonstrating the dangers of sovereign risk in “key sectors”.
The underlying and secular milling business however was a stable, and profitable, if low tech, business that clearly indicates to us that a business doesn’t need to grow or expand to provide suitable returns to shareholders.
The Bazacle company’s dividends reflect a stable fundamental economic process that was presumably well understood by investors thanks to at least two centuries of milling business that predated the creation of the firm in 1372.
Innovation in mill technology was slow before the late 19th century. A significant part of the sample period precedes the Industrial Revolution (before 1760) and the modern period of high gross domestic products growth by Western economies.
The returns
The incredible thing that I find about the case of the Bazacle company is just how similar the real returns for investors in the company are to the real returns for the average stock market over the past hundred or so years.
On the other hand, the returns for investors in this company, even with the nationalization are a little over 5%, almost entirely as a result of the average dividend yield paid.
Over the periods from 1532 to 1888 and from 1889 to 1946, the arithmetic average annual real capital gains were 18% and 6%, respectively.
The geometric means of the capital gain (not reported here) were slightly negative from 1372 to 1946 for all the subperiods we consider.
Such a near-zero long-term capital gain is consistent with the dividend policy of the firm for much of its history, i.e., to payout all earnings.
And the dividend yield:
The average dividend yield over this entire period from 1372 to 1946 is around 5%. This holds for all the time periods we consider, suggesting stability in income return over centuries.
So when it really comes down to it, dividends do matter, and investors returns tend towards the capital that is returned to shareholders over time.
What do you think about these old publicly traded companies? Do you know of any older ones?
Let me know in the comments below!
Such a well written story. Thank you.
Maybe a 5% to 7% real return is a sort of financial constant throughout the ages.