Introduction
In uncertain times, the Central Securities Corporation (NYSE:CET) (the “Company“) provides, among other things, an investment portfolio (the “Portfolio“) that has stood the test of time, management continuity, a reasonable expense ratio, a discount to net asset value, and a rational, no frills approach to investment management. Morningstar rates the Company 5-Stars Overall and for the 3, 5 and 10 year periods.
For the foregoing reasons, among others, the Company, which operates under the radar, should be on yours. My Rating: Long-Term Buy
Central Securities Corporation
While not especially well-known, the Company, organized on October 1, 1929, is one of the oldest and most successful closed-end fund operators.
The Company operates as a non-diversified investment company. As such, the percentage of the Company’s Portfolio assets that may be invested in the securities of a single issuer is not limited by the Investment Company Act of 1940. In short, the Portfolio of the Company is very concentrated.
The overall aim of the Portfolio is long-term growth of capital; dividends and income received from investments is a secondary consideration.
Per its dividend and distribution policy, the Company distributes substantially all of its net investment income and realized capital gains to shareholders. Consequently, distribution amounts vary significantly from year to year. In 2023, the Company distributed $1.85 per share in dividends to its shareholders.
In pursuing its investment objective, per its website, the Company takes a long-term approach and invests primarily in equity securities that it believes are undervalued in light of their growth potential. Notably, the Company constructs the Portfolio to “generate superior returns when compared with the broad market and preserve the Corporation’s capital in an inflationary environment.”
In choosing investments for the Portfolio, the Company seeks (per its website):
Honest management working in the interests of all shareholders is of the utmost importance in the appraisal of investments. We may sell securities for a variety of reasons, including excessive valuation, deteriorating results or to redeploy assets into more promising opportunities. Central is not restricted as to the types of securities (e.g., equity, fixed income) in which it invests. We may invest in securities of issuers with any market capitalization.”
The Portfolio
As of September 30, 2023, the Portfolio’s largest equity investments were as follows (the last column shows the holding period):
| Ticker | Symbol | Cost |
Value (Millions) |
% of Portfolio |
|
| The Plymouth Rock Company | — | 0.7 | 284.2 |
23.3 |
1982 |
| Analog Devices, Inc. | ADI | 5.5 | 77.0 | 6.3 | 1987 |
| Alphabet Inc. Class A | GOOGL | 26.0 | 65.4 | 5.4 | 2015 |
| Progressive Corporation | PGR | 25.7 | 60.6 | 5.0 | 2015 |
| Hess Corporation | HES | 15.1 | 55.8 | 4.6 | 2017 |
| AON plc | AON | 29.1 | 48.6 | 4.0 | 2020 |
| Motorola Solutions, Inc. | MSI | 6.8 | 46.3 | 3.8 | 2000 |
| The Charles Schwab Corporation | SCHW | 25.7 | 38.4 | 3.2 | 2016 |
| American Express Company | AXP | 19.8 | 34.3 | 2.8 | 2015 |
| Meta Platforms, Inc. | META | 30.3 | 30.0 | 2.5 | 2021 |
Source: Company Website
When reviewing its top holdings, a few things stand out to me. First, the Company clearly invests for the long term. Three (3) of the top ten (10) Portfolio investments have been held for more than 20 years. Charlie Munger’s first rule of compounding is to never interrupt it unnecessarily, and the Company is clearly an adherent to that dictum.
Second, a private company is the Portfolio’s largest holding by far. At more than 20% of the Portfolio, the Company acquired a portion of private insurer Plymouth Rock in 1982 for less than one million dollars. Today, the value of the position is approaching $300 million. An amazing ROI! Per the Company 2022 Annual Report, it owns approximately 23% of the outstanding shares of Plymouth Rock.
Plymouth Rock is led by owner-operator, Jim Stone. Mr. Stone was a former insurance commissioner of the Commonwealth of Massachusetts and, unsurprisingly, Plymouth has a strong footprint in New England. Mr. Stone’s annual letters are a worthwhile read and I look forward to reading his 2023 letter when it is released. Overall, Plymouth is a very impressive insurance company and owning the Company provides investors with meaningful exposure to this unknown private gem.
Third, other than Plymouth Rock, the Portfolio is made up of established, blue-chip companies.
In terms of sector weightings, per the 2022 Annual Report, insurance related stocks make up approximately 31.8% of the Portfolio followed by Technology & Semiconductors (18.2%) and Diversified Financials (10.4%).
According to Morningstar, the Portfolio’s valuation appears reasonable compared to similar funds in the Large Blend category.
| Value & Growth Measures | Investment | Cat. Average |
|---|---|---|
| Price/Earnings | 16.49 | 18.62 |
| Price/Book | 2.66 | 4.04 |
| Price/Sales | 2.87 | 2.11 |
| Price/Cash Flow | 11.46 | 13.88 |
| Long-Term Earnings % | 10.01 | 9.66 |
| Sales Growth % | 10.42 | 12.08 |
| Cash-Flow Growth % | 5.54 | 8.70 |
| Book-Value Growth % | 5.74 | 5.09 |
| Investment as of Sep 30, 2023 | Category: Large Blend as of Nov 30, 2023 | ||
Management
According to the Company’s website (linked above):
After managing the Corporation since 1973, Wilmot H. Kidd stepped down as Chief Executive Officer effective December 31, 2021. Central Securities is now managed by John C. Hill, Chief Executive Officer, who joined the Corporation in 2016. Mr. Hill is assisted by Andrew J. O’Neill, Vice President, who joined the Corporation in 2009. Wilmot Kidd continues to serve the Corporation as Chairman of the Board.
During his tenure (1973-2021), Mr. Kidd achieved an excellent investment record. As shown in the 2021 Annual Report, during Mr. Kidd’s tenure, the Company compounded value at a very high rate (roughly 13+% per year).
In 2022, after Mr. Kidd retired, the Company’s net asset value declined by 12.25% (according to Morningstar), compared to the S&P 500 Index’s 18.1% decline, and in 2023, while the Company did not beat the S&P, it did handily beat the S&P 493 with its gain of 19.1 percent (according to Morningstar). As a result, it can be deduced that the handoff from Mr. Kidd to Messrs. Hill and O’Neill has been successful (at least thus far).
I appreciate too that management of the Company is willing to buy back its stock when the discount to NAV is wide. In its most recent Interim Report for the period ended September 30, 2023, it was noted that:
During the nine months ended September 30, 2023, the Corporation purchased 48,978 shares of its Common Stock at an average price of $35.61. The Corporation may from time to time purchase its Common Stock in such amounts and at such prices as the Board of Directors deems advisable in the best interests of stockholders.”
The willingness of the Company’s Board to buy back shares is notable because closed-end funds are often reluctant to do so since such actions, although positive for shareholders, can reduce management fees by reducing the total assets managed.
The Company’s current discount to net asset value (“NAV“) is more than 17%. While this can theoretically provide a cushion in a downturn, there is no guarantee that the discount will narrow; indeed, the average discount over the last year has been about where it is today. That said, the discount does have the effect of 1) lowering the already reasonable management fee of 0.50% charged by the Company, and 2) boosting the dividend yield. In addition to the reasonable management fees, I think prospective investors should be encouraged by management’s conservative approach to its website and financial reports, all of which have a “no-frills” quality to them.
Ownership/Skin in the Game
The key executives of the Company do have skin in the game:
William H. Kidd IV, chairman of the Board owns more than 300,000 shares (roughly 1% of the 28 million shares outstanding); Mr. Andrew O’Neil, Vice President owns more than 80,000 shares; and Mr. John C. Hill, CEO, owns more than 64,000 shares. At the market lows back in October 2023, management of the Company started to step up and buy shares at roughly 10% below today’s price.
Institutional ownership of the Company shares is approximately 11%. Highly regarded value manager, Third Avenue Asset Management, owns an interest in the Company.
Risks
Per its 2022 Annual Report, an investment in the Company is subject to various risks, including 1) a substantial portion of the Portfolio being invested in the common stock of The Plymouth Rock Company, a privately issued, illiquid security, 2) non-diversification risk (as noted above, the Company is a “non-diversified” investment company), 3) the Company is permitted to invest a significant portion of its net assets in illiquid investments, 4) closed-end investment companies like the Company often trade in the market at prices lower than their NAV (indeed, the Company’s shares have generally traded at a material discount to its NAV), and 5) the Company is reliant on certain key employees.
On a sector basis, the Portfolio has a lot of exposure to the financial system via its insurance stocks (roughly 32% of the Portfolio), plus its positions in American Express (AXP), Charles Schwab (SCHW), JP Morgan (JPM) and Visa (V) (another roughly 10% of the Portfolio). A U.S. or global credit or financial crisis could have a disproportionate effect on the Portfolio’s holdings. Such an event cannot be ruled out, particularly with the out-of-control U.S. fiscal deficit, not to mention U.S. Debt now exceeding $34 Trillion. Such an event would also likely involve substantial regulatory changes, which changes could adversely affect these highly regulated insurance and financial companies.
Of course, all of the insurance exposure also means that the Company’s success is in some measure dependent on its insurance company investments minimizing and mitigating the risks associated with insuring and reinsuring catastrophic events.
A full list of the risks associated with an investment in the Company is included in the linked 2022 Annual Report above.
Potential Catalysts
After a poor year in 2022 (in large part due to investment losses, COVID price inflation and catastrophic weather conditions), Plymouth Rock should rebound in 2023 as inflation has slowed and both bonds and stocks have rallied strongly through the end of 2023. Those results will show up in the Company’s year-end 2023 results.
Moreover, the higher interest rates on bond portfolios will not only help Plymouth Rock, but they should also continue to support Progressive (PGR), another insurer that is roughly 5% of the Portfolio, by providing greater investment income on their respective cash reserves and bond holdings.
The Company’s stock is well supported at $35 and under by Company buybacks and insider purchases, making it probable that the Company’s stock will break out to the upside in the future as it has been trading sideways since the middle of 2022. Finally, the Company’s Alphabet (GOOGL) Meta Platforms (META) and semiconductor holdings (5.4%, 2.5% and nearly 9% of the Portfolio, respectively) do give it meaningful exposure to the technology sector should those stocks continue to outperform.
Conclusion
Conservatively operated and managed, the Company offers investors an investment portfolio built for the long term. A reasonable expense ratio, management continuity and skin in the game, excellent Morningstar ratings and the potential catalysts described above further buttress the case for the Company. I reiterate my Buy recommendation for the Company and added to my position on January 11th at $37.25. Of course, do your own due diligence.
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