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Outworking Consumer Sentiment





If you Google “consumer sentiment,” there are 61.7 million search results. There are even more opinions and predictions, tied to each one of those, about what should be happening to the U.S. consumer’s ability to buy stuff.

 

We’ve never read a single one of those words in the portfolio management offices at Freedom Day Solutions. We prefer doing the simple math of dividend growth, which provides the best clues about what is happening. A dividend raise does not include any prediction and gets cashed regardless of anybody’s opinion.


We like to find businesses that are too busy making stuff, that unique consumers need to buy, to worry about what should happen next. One of our favorite examples we know well is on farms, where the only time for any sentiments for those hard workers is after sundown.



 

(me and my grandpa / my son and his grandpa)

 


Shown below is the dividend paid to the stakeholders of Tractor Supply (TSCO), next to the up and down feelings of the average U.S. household of consumers, as measured by an index of surveys from the University of Michigan.

 


US Consumer Sentiment Tractor Supply Graph

 

The reasons behind some of those dividend raises are fascinating to learn from. We like sharing them for anybody who wishes to know more about our portfolio holdings, or who wants to save countless hours reading about what should happen next and enjoys a little non-fiction instead.

 

Tractor Supply was born at the kitchen table in Charlie Schmidt’s Chicago apartment, in 1938. He saw an opportunity for a mail-order business to sell tractor replacement parts to frugal farmers, whose only other option was paying a premium to the manufacturer. His first catalog sold $50k of spare parts.

 



 

Two years later, his first store was opened in North Dakota, positioned between a grain elevator and a railroad, so his few employees had something to do when they weren’t filling mail orders. They offered a free screwdriver set to any customer who sent them the names and addresses of 5 friends who owned a tractor.  

 



 

Not a bad start for a guy who wasn’t allowed to graduate college due to unpaid library book late fees (Charlie later donated hundreds of millions to that school and received an honorary degree from the University of Chicago). His career began by sweeping floors and washing the boards at a Chicago brokerage house. He also watched those boards enough to know when farmers were going to have good or bad years. His tractor supply business was founded with a few thousand dollars. He designed that first 24-page catalog from scratch with zero experience.

 

Born on the heels of a depression, Tractor Supply was gathering strength before a world war interrupted everything. The customer base began slowly vanishing over the next 30 years, moving from the farms to the cities. The business struggled significantly. A small number of large corporate farms began replacing most of the small family farms. But Tractor Supply survived, despite all the worst sentiments. They refocused, brought in new leadership and  were committed to serving its unique customer – farmers & ranchers. They pivoted through changes and even big mistakes. A simple lesson we’ve learned from our longest-term portfolio holdings is that the key to one day thriving in a good market is the ability to survive any market.

 

Then, something magical happened. Americans remembered they loved the open spaces in the country still in their roots, before they started crowding into cities. They began moving in the other direction back to a different kind of farm.

 

Tractor Supply’s corporate mission is to “Work Hard, Have Fun, Make Money.” A big reason they can do that is more of their customers are now having the time of their lives on recreational farms! Still serving the working farms, now the stores are filled with part-time farmers also.

 

Management describes the math behind the acceleration of revenue growth from the same amount of dirt around the stores. Now, a ‘For Sale’ sign in front of a 1,500-acre farm was no longer a potential lost customer – but an opportunity to gain 10 new customers. Each could have 150 acres to fence, mow and feed animals on.

 

It took Tractor Supply six decades to reach $500m in annual sales. Currently, they are doing more than that each month. The dividend paid to stakeholders has been raised more than 20% per year, for the last decade.

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