Engro Fertilizers (PSX: EFERT) has been one of my top investment recommendations for a while, purely due to its handsome dividend yield over the years and the mathematical concept of power of compounding. While looking for tenbaggers, people generally tend to focus on exciting stories and ignore the power of compounding. EFERT is an amazing example of a relatively lower risk and patient investment that has grown into almost 10x over the last 10 years just by virtue of dividend reinvestments.
The working below explains how gradual dividend reinvestment (after-tax) into the same stock has led to multiplication of the capital. For simplicity of calculations, I have assumed reinvestment price equal to ex-price. The precise compounding is 9.4x with 3.6x emanating from accumulation of shares and 2.6x from the share price growth.
While EFERT’s stock price remained under-appreciated for nearly 9 out of these 10 years, it has emerged as one of the top performing stocks of the bourse. As mentioned earlier, fundamentals reign supreme in the long run.
About the power of compounding, let me conclude with what Albert Einstein said, “Compounding is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”