What Does a 'Fat Pitch' Look Like?

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While it may be a somewhat misused paraphrase of Warren Buffett's famous baseball analogy, 'fat pitch' is a term often thrown around in investing circles. In most settings, it implies that an investment opportunity is extremely lucrative with a high probability of success—but they are rare. Beyond having the discipline to patiently wait for these opportunities, what does a 'fat pitch' actually look like?

In this episode, Greg discusses the concept of 'fat pitches' by exploring the extraordinary long-term performance of Altria (formerly Philip Morris), despite numerous industry challenges and negative headlines. Through a detailed analysis of Altria's historical performance, including its high dividend yield and impressive cash flow management, he emphasizes the timeless principles of dividend growth, patient investing, and compounding. 

00:00 Introduction to The Dividend Mailbox Podcast
02:34 Review of Current Dividend Growth Performance and Market Observations
06:13 Case Study: The Success of Philip Morris
15:58 Key Takeaways from Philip Morris's Performance
24:51 Lessons on Dividend Growth and Compounding
32:14 Conclusion and Final Thoughts 

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Transcript

 [00:00:11] Greg Denewiler: This is Greg Denewiler, and you are listening to another episode of The Dividend Mailbox, a monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks. When they grow over time, a funny thing happens—you create wealth. 

Welcome to episode 45 of The Dividend Mailbox. And actually, I must admit, when we started to work on this, my whole motivation for doing this episode changed a little bit. When we first started working on it a week ago, we were just looking at, Alright, what can we learn from the past that will help us be more successful in the future? But as things have developed over the last week or so, I think, on one level, this really kind of plays in and is great timing. 

As we get into this episode, we're going to look at What does a fat pitch look like? And "fat pitch," I believe, came from Warren Buffett. Basically, it means you don’t have to swing at everything—you can wait. The example we're going to look at is the most successful investment over, for all intents and purposes, a century. 

One of the great things I think you can potentially learn from this is that this company has had all kinds of negative headlines—just countless reasons why this should never even have come close to being a great investment. We're hearing a lot of that today. There are a lot of headlines flying around, and there are all kinds of reasons you can come up with to think, Ooh, this could be really difficult and challenging for a while. 

As we get into this episode, I think you're going to find out that compounding and cash flow still work—and probably always will. 

Before we get into the podcast, let's just do a quick review. This is a great chance to help define, Okay, why do you invest in dividend growth as opposed to other choices, other strategies? If you look at year-to-date right now, our model portfolio is up 2.6% for the year, and the S&P 500 is down 5%. 

At the moment, it is showing much more resilience, and quality and income seem to matter. Of course, that can change. The more important thing is the predictability of the income stream. We've already started to get income, and pretty much dollar for dollar, it's matching what our projections are for 2025. 

Last year, it ended up at 8.4%, and right now, we're looking at about 10% income growth. And that's just going to come through the dividends and the dividend increases that have already occurred from the end of last year into this year. That, in and of itself, in a turbulent market—or, I should say, in a market with a lot of headlines going on—It sure does help knowing that if my income comes in 10% higher than last year, long term, it's probably going to make all this volatility pretty much not matter. But, of course, it's our theory, and it's up to you to decide if you agree with it or not. 

So, our dividend growth strategy is holding up fairly well, but one thing we are committed to here at The Dividend Mailbox is that we love to put investment ideas out there. However, what we don't want to do is put an idea out there just to have content. We really want to try to stick with quality. I want it to be a conviction—something that we really want to own. 

That doesn't mean we don’t own things in our model portfolio. We've got some things that we're patiently waiting on. We'd love to see a few things come down. One of my favorites is Union Pacific—that’s on our watch list, but it needs to come down about 10%. So, we'll see how that shakes out. 

We've been following Hershey. Hershey has really bounced back nicely, but what kind of came to mind is, Okay, we're sitting here somewhat in a hold mode. Although, I mean, we invest—we look at places to put money. If we have new money come in, we have places that we put it. But hey, if you had to bet all your money on one idea, this would be it. 

Well, we don’t really have one of those at the moment. However, having said that, I have to say that anytime you think, This is my single best idea, and this one can't miss, I hate to say it, but a lot of times, that ends up not being the case. 

In fact, in our model portfolio—I've been through this before—but one of the ones that we almost didn’t put in there when I originally started this portfolio was something that I hesitated on. But I decided, Because of the great yield and how cheap it was, why not? The market probably already has that factored in. 

Well, that was Lockheed Martin, and it turned out to be one of our big winners. 

So, in thinking about this episode, Warren Buffett is known for saying the great thing about the markets is you don’t have to swing at all the pitches. You can wait for a fat pitch. You can have 20 strikes called on you in a row, and it doesn’t matter because you can stay in the game. 

We decided—why not look at one of the great success stories of the past? Not only was it a great investment long term, but it was also a standout in dividend growth. 

So, let’s start with this: I’m going to give you a scenario, and you’re going to decide—would you be excited about buying this stock? 

So, we're going to go back to December of 1984. I'm going to give you kind of a background of what was going on at the time. The P/E of the S&P 500 was right around 10, the dividend yield of the S&P 500 was 4.6%, and long-term interest rates were around 11.5%. 

We were coming out of the '70s, in a full-out battle trying to bring inflation down, and the market was fairly cheap. 

Here's the first observation to note: it would have seemed easy to just buy a long-term Treasury and get 11.5%. That wasn’t a bad move. However, eventually, they mature—and look where you’re at now for yields. If you had a 30-year bond in 1984, that means it matured in 2014, when your reinvestment rate at that point was 1% or 2%. So, there’s your risk on that trade. 

Looking at the market, the best thing you could have done was to put everything in the market at that point because the '80s and '90s had tremendous returns for the S&P 500. In our opinion, it's really important to figure out why you’re doing what you’re doing—and then stick to the story. 

So now, what I’m going to do is give you some characteristics of a company. I’m going to give you a little future insight here, but I’m not going to tell you what it is yet. And what you’re going to do is decide whether, Hey, this is something maybe I should look at, or What in the world? Why would I want to invest money into this? 

You got a company that has $10.1 billion in revenue in 1984. Going to December of '09, revenue has increased to $23 billion. Okay, you got to remember that that's more than 20 years, so that's not anything out of the ordinary, really. And then, from December of '09 to December of '24, revenue actually declined. 

It went from $23.5 billion to $20.4 billion. Now, there were some things that happened in there, so that's not just a net revenue decline, but we'll get to that in a little bit. The bottom line is you can already get a picture that this company is not anything that looks very exciting. 

Total assets in December of '84 were $5.7 billion. They grew total assets up to $30 billion in March of '09. And then, you get to December of '24—assets were $30.6 billion. Basically, their asset base was flat. 

When you look at debt—well, debt in December of '84 was $2.6 billion. By March of '09, debt was up to $13.6 billion. Right there, it's pretty clear that a big part of that asset growth was financed through debt. 

And one thing that you hopefully have gotten from our previous podcasts is we're big believers in—you got to be careful with financial engineering, where they just basically buy their way into growth. You go from March of '09, $13 billion, to December of '24, where you get to $24.9 billion in debt. So, debt continues to grow over the next 15 years. 

And then, I'm only going to give you one number, and there's a reason for this. Return on invested capital—I couldn't find the number for '84, but, you know, it's probably not that different. In 1989, return on invested capital was 10%. So, you know what the future looks like. You're given an opportunity in 1984. 

How much money do you want to put into this idea? Sounds like an average or maybe even a below-average company. Well, I'm going to give you a few more details. 

In 1998, 46 states sued this company and three others for $206 billion over 25 years, which is what the settlement was. You have an industry that doesn't grow much, that can no longer advertise. 

You got a product that's going to get taxed probably heavier than anything else out there. It becomes something that is socially—let's just leave it as not attractive. Although, obviously, people still use their product. 

So, you've got huge headwinds that you're facing. Not only that, in December of 2018, they buy a company. They acquire 35% of it for $12.8 billion. One year later, it's written down to $4.5 billion. And a few years later, their investment for $12.8 billion is now valued at $600 million. 

Things haven't exactly gone too well there either. 

You've probably figured out that it is a tobacco company—and it was Philip Morris. Name's Altria. I'm going to use these names interchangeably, but they actually did spin out Philip Morris International. This company is kind of complicated, but I'm going to try to keep it as simple as possible. 

If you don't know, and this came from a few different sources—but we use YCharts, one of our main sources for financial data—here's what you're about to find out. 

Going back to 1972, all the way to March '25—if you put $10,000 into the S&P 500, you have a total return of $2.46 million. That's 11% a year. 

If you put $10,000 into Philip Morris, you now have $415 million. That's 22% a year. 

From July of 1972, the price of Philip Morris—just the stock alone, excluding the dividend—grew to $2.35 million. I mean, that says something because that basically kept up with the S&P 500 total return over that period. 

But when you throw the dividend in there—that's how you hit $415 million. 

The difference between earning 11% a year and 22% a year—doubling your return—is the difference between basically being on Earth and being out there somewhere on Pluto. I mean, compounding is huge. 

In 1989, Philip Morris had grown to $16.8 million, and it's still running at a 22% annual compounded return going from 1989 through today. 

You know, the returns have been phenomenal. 

The S&P 500 over that time period grew to $347,000. That's 10.3%. It's running at about the same rate. 

Here are a few statistics I find amazing. 

Microsoft—which, if we looked at revenue numbers (and I didn't even pull this out, and I'm not going to bother because I guarantee you they are huge—and you already know that)—Microsoft, investing in that same time period, 1989 to today, total return is $15.8 million. 

It did not match Philip Morris. 

Apple—Apple really didn't get going till that iPhone came out, and they were near bankruptcy in the '90s. But they've grown to $7.35 million. Think about that one. 

Even going from December '09 to today: 

• $10,000 in Philip Morris → $74,000
• S&P 500 → $70,000

It is still beating the market.
 
What you should notice is—the dividend made all the difference in this story. Because the price alone did relatively well, basically matched the market.
 
But the dividend was the kicker.
 
It was receiving the income, reinvesting, continuing to reinvest, and you were able to reinvest at very cheap prices—and then just being patient and letting it compound.
 
When you look at these charts and you look at the track record of a company, you see how well it's done.
 
One of the things you tend to say to yourself is, "Oh, well, yeah, that was fairly easy."
 
But what people seem to forget in pretty much all these stories is—you have to be patient, and you have to wait.
 
And in regard to Philip Morris—people see a big lawsuit from all the states.
 
They see the cancer risk.
 
They see it's probably one of the most heavily taxed products out there.
 
I mean, all the different scenarios that hit this industry.
 
And I'm not saying it's right or wrong.
 
I'm just saying that these are things that probably shook virtually everybody out—and very few people stayed in there for the big home run.
 
So let's try to figure out, okay? Is there some hint here? Because this is what we're trying to get at in this podcast. What are we looking for? What are some of the indications of whether we're going to get this long-term total return and long-term dividend growth?
 
But this is where, you know, investing is never a perfect science, and there's no secret formula that works all the time.
 
When you go back and look, in December of 1984, the P/E of the S&P 500 was around 10, the dividend yield was around 4.6%, and long-term interest rates were at 11.5%. Philip Morris's dividend was 4.27%, so it actually was slightly less than the S&P 500. But here is your first hint: the P/E of Philip Morris in 1989 was 3.
 
It was beyond cheap, and it was cheap for obvious reasons. However, what Philip Morris does is generate a lot of cash flow. One of the things that you didn't know at the time—I told you originally return on invested capital in 1989 was 10%. Well, by March of '09, after being sued and not being able to advertise, return on invested capital had increased to 33.9%. And by the end of last year, return on invested capital was up to 57%.
 
They are extremely profitable. Operating cash flow, even though it hasn't grown by much, has generated $267 billion from December of '89 to today. If you just go back to December of '09 to today, they've generated $96.5 billion in operating cash flow.
 
When you have a market cap back in April of '84 of $1.9 billion, and even in January of '09, it was $35 billion, they're generating tons of cash flow. And that is a big piece of this story.
 
Operating income went from 18% in '84 all the way up to 56% in December of '24. Operating income was $11.6 billion for the year ending in 2024.
 
I want to go back and remind you—total debt in December of '24 was $25 billion. They generate enough free cash flow to buy back almost half of their debt in one year.
 
From December of 2010 to December of '24, they paid out $75 billion in dividends. Through 2024, they bought back $18.9 billion of stock, so they had a total return to shareholders of $94 billion from 2010 to December of 2024.
 
The dividend in '09 was $1.28. It's grown to $4.08 in 2025. The P/E in January of '09 was 6.5. The P/E currently is 8.5. Earnings have grown from $1.47 to $6.55 ending in 2024.
 
So what you've got is a company that really hasn't grown revenue by that much, but it's a huge cash flow story.
 
They did spin off Kraft in 2007, which was a pretty significant spinoff. That partly explains some of the revenue growth. They purchased UST, which was smokeless tobacco, in 2009. Back then, they thought that was going to be a safer alternative and tried to diversify their business, but that has changed for them.
 
The Juul write-off basically came from a bill passed right after the Juul purchase that banned flavors for electronic cigarettes. I'm not going to feel sorry for them, but it's something that they really couldn't foresee on that.
 
Another point to remember is that Philip Morris is somewhat an exception to the rule. And what I mean by that is usually, you don't get good dividend growth rates from high-yielding companies because they're paying out more of their profits in dividends, and they're not reinvesting as much.
 
In the case of Philip Morris, you had a yield that basically averaged 7–8% a year for decades. Not only did you get a high yield, but it grew faster than the S&P 500's dividend rate. If you have listened to our podcast, you know that rate is around 6%. Philip Morris grew for several decades at almost 9% a year.
 
So you got a very attractive growth rate too.
 
You put those two things together—it's very rare for those two things to be together, but when they are, magic happens.
 
Based on data from the Center for Research in Security Prices, from December of 1925 to December of 2023—just a fraction less than a century—Philip Morris is the best-performing stock over that period.
 
Now, here's something for you to wrap your head around.
 
In fact, if your grandparents have a safe deposit box, you might want to go check it out. Because if you were lucky enough that somebody put $100 of Philip Morris in a safe deposit box in 1925, and you just by chance stumbled across it, you just found $267 million.
 
I also want to throw out there—we don't own it.
 
It's in a lot of dividend portfolios—either indexes or people that manage for dividend income because the yield is still there. It is a very well-managed company, but we don't own it, and I doubt we are going to. It's just a personal choice.
 
I also reserve the right to change my mind at some point, but the problem is—or, I don't view it as a problem.
 
It's an individual choice.
 
If you choose to smoke, you can smoke.
 
You're not exactly putting the odds in your favor that you're going to live a long, happy life. But people choose to smoke. We are in a free society.
 
So what's the takeaway, or what can we try to learn from this?
 
The question becomes: How in the world did this stock perform so well when the P/E really hasn't expanded that much? The dividend has grown, but there are a lot of other companies out there that have grown their dividend at that kind of a rate.
 
What does a fat pitch look like?
 
Well, one, it was good management. They didn't make too many mistakes, and they stayed disciplined.
 
Two, there was an attractive dividend yield, and it stayed attractive pretty much for your entire period of compounding because tobacco has basically been out of favor for decades.
 
Three, you had an attractive dividend growth rate.
 
And that leads to number four—you were able to reinvest at very attractive rates. Not only was the stock cheap, but it was still a growth story.
 
I think there are three things to take away from this.
 
Okay, first thing—price matters.
 
Jeremy Siegel’s big point is what you really want is a company that stays cheap for several years—a decade or more. If you've reinvested at very attractive rates, the big gain at the end comes in multiple expansion.
 
And not only that, but you've accumulated a lot more shares because the price was cheap, so it compounded faster.
 
But in Philip Morris's case, the P/E never expanded.
 
Well, if you buy a stock and you have a dividend yield of 8%, you're able to take that 8% and continually buy more stock and earn 8%, paying only about 10 times or less for that company. You've had the ability to compound at a very cheap price—really, indefinitely.
 
So price matters.
 
Number two—you know, what you've had all along with this is great management discipline.
 
Even though the industry is only projected to grow by 3%—which, actually, that number surprised me when I looked it up; I thought it was a declining industry, but it’s projected to grow by about 3% going out to 2030—Management has done a tremendous job of working through a very challenging market. They've stuck to what they've done. They're trying to diversify away from it some with some of the stuff they're doing now, but they still sell tobacco products. They didn't take their cash flow and just go out and start buying stuff. They've done a few, but not very much. And that is a significant factor because most of these companies that generate a lot of excess capital— it seems to be like a disease. They want to go out, and they want to build an empire through acquisitions. All the research points to the fact that they very seldom are accretive or good for shareholders.
 
Number Three—Cash Flow Matters. And this is where we really try to preach and really try to pay attention to cash flow because, in the end, cash flow is what's going to grow the dividend. If earnings grow, the dividend can grow. And over time, that's where you're going to create wealth. Is there any secret formula? Again, no. But don't underestimate the power of compounding long-term, and you have to reinvest.
 
Now, this gets into a little bit of a debate, and I actually saw a paper the other day. It said, well, most people don't get the market returns because they don't reinvest, or they don't get the Philip Morris return because they didn't reinvest the dividend over that whole period of time. In all total return calculations, it always assumes that the dividend is reinvested.
 
In our case, the way we approach it, we do not automatically reinvest dividends in each individual stock. When it pays out each quarter, we personally like to take the cash and then reinvest it where we think the best opportunity is. That may be more of the stock that just paid the dividend, or it may be looking somewhere else where we just think there's more value.
 
Warren Buffett—he's owned American Express and Coca-Cola for several decades. American Express has been a pretty good performer. Coca-Cola, not so much. But what he's done is he's taken the dividends and reinvested them—not in American Express or Coke—but he put the money somewhere else. One could maybe argue that it evens out over time, but you got to do what makes you feel more comfortable.
 
Summing Up
 
As far as I know, the whole "fat pitch" comment—his take on this was, you don't have to swing at every pitch. You don't even have to swing at every 20 pitches. Just understand what you're comfortable with, what you do relatively well, and then stick to it. When the time comes to swing, then you swing hard.
 
Ultimately, what you want is total return. These fat pitches—Philip Morris was just a huge example. They had a very profitable balance sheet. They reinvested that money. They paid it out to shareholders. They grew the cash flow over time. It all really ties back to total return.
 
We spent a lot of time looking at a growing dividend stream because, almost by default, if a company grows its dividend by 6 percent or more a year, then it has to be a profitable company. It has to have discipline over time. It has to be a growth stock on some level.
 
Another part that you really have to keep in mind is that you should never look at a strategy because you think that is the most attractive thing to do at the moment. Dividend growth—it's really about a long-term commitment. If you're going to look at more of a growth momentum stock, the last few years have just been great examples on both sides of this.
 
The "Magnificent Seven"—you know, that name has been probably beat to death. But the last few years, just phenomenal returns. Dividend growth, more dividend-centric strategies, haven't done so well. Now, we go into this year—dividend growth, relative to the overall market, is doing well. So, the strategies ebb and flow.
 
The main point is: Don't chase strategies. Chase total return, and chase compounding long-term. That's how you create wealth.
 
If you enjoyed today's podcast, please leave us a review and subscribe. If you would like more information regarding dividend growth or our investment strategy, please visit growmydollar.com. There, you will find previous episodes and also our monthly newsletter. If you have any questions or anything to add to today's episode, please email Ethan@growmydollar.com.
 
Past performance does not guarantee future results. Every investor should consider whether an investment strategy is right for them and all the risks involved. Stocks, including dividend stocks, are volatile and can lose money. Denweiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.