Koch Industries has seen tremendous growth in the last 50 years. This has been primarily due to the vision of Charles Koch to continuously improve and grow the company. There is no question that Charles Koch has one if not the best of track records in terms of the rate of long term growth rates of any corporation.
The main reason for this astounding growth rate is the company reinvests 90% of their earnings back into the company (no major publicly traded company would ever consider doing this). Publicly traded companies have to deal with managing investor expectations and like to see smooth increases in earnings and steady increases in dividends. As Charles Koch mentions in this interview with Peter Robinson that Koch Industries had "a small number of shareholders so we can reinvest 90% of our profits in the business so that gave us us the capital to continue to do what we do and still pay out enough so our stockholders had all the money they needed". Koch has also diversified into other businesses over the years. In the 1970's Koch purchased Chrysler Dealerships for $195 million and then by 1982 had sold back 480 properties. In 1989 Koch entered the nitrogen fertilizer business. By 1995 the company created a venture capital fund that invested $150 million into start up companies. More than a decade later Koch would purchase Georgia Pacific This SEC file page and this Wichita Eagle from 1994 (page 24) offer insights into the rapid growth of Koch Industries and the rate of which they were involve in acquisitions. Even the chemical technology group of Koch Industries that David Koch ran saw massive growth. During his 48 year tenure David expanded his division and his division alone purchased 50 businesses (about 1 business on average every year).
One merger that really grew Koch Industries was acquiring Georgia Pacific. Georgia Pacific back in 2004 only had a profit margin of 3%. In my Georgia Pacific case study post I noted that Georgia Pacific is roughly worth $30 billion. Georgia Pacific also consisted of a large portion of the revenue generated by Koch Industries. The history of Koch Industries would also support low profit margins. Charles Koch mentions in this interview that when he took over Koch Engineering the subsidiary had only $2 million in revenue and was pretty close to break even. After Charles took over within a few years sales had doubled and also had a good return. In 1981, according to the Koch vs. Koch case Koch Industries had a roughly $15.7 billion in sales and had earnings of $273 million which would say that profit margin was only under 2% (which is quite low). In 1982 Koch Industries had revenues of close to $17 billion and earned $309 million which would be a profit margin of a little under 2%. The only problem with a low profit margin is if you invest in enough bad capital projects you would risk the safety of the company.
Koch Industries has an unusual policy of reinvesting 90% of their earnings back into the company. In this 2013 Fortune article it is mentioned that Koch Industries spends roughly $100 million per year just on research.When corporations have earnings they either can reinvest by growing and expanding the company or pay out the earnings as a form of a dividend. According to this Koch brochure from 2003 to 2014 Koch Industries invested $65 billion into mergers and acquisitions. If $65 billion represents 90% of the earnings it would say that Koch during this time period earned roughly $72 billion. Now this would say that the company earned on average $6 billion per year. I would highly emphasis on average given Koch is known for continually to grow earnings. The issue with reinvesting 90% of the earnings back into the company is that not all projects will work out. Usually in corporations capital spending is reviewed by a team of individuals and then has to be approved by management before the money can be allocated and spent (the more money that is spent the higher level of approval the project has to receive). There are assumptions made regarding the return on capital the project will produce. Often times companies may have hundreds of projects but only have so much capital so they have to be selective about which projects get funded. Companies will rank the project by the return on capital invested. By reinvesting 90% of the earnings it would be hard to justify that all projects are worthwhile. However, the history has shown that Koch has invested in projects that have done quite well.
The extreme growth in Koch Industries has led to an amazing increase in the amount of dividends for Koch Industries shareholders. According to Sons Wichita in 1967 (when Fred Koch passed away) the company only paid out $300,000 in dividends (would be roughly $2 million in current dollars). By 1978 the dividend payouts were $3.7 million and by 1980 grew to $17.5 million and then to $28 million in the early 1980's. Not only was the Koch family doing well from the dividends but other Koch shareholders were also doing well too. J Howard Marshall in the mid 1990's with his 15% interest was earning between $7-8 million in just dividends from 1994-1995. Again as the growth of Koch Industries exploded so did the dividends. In 2015 Preston Marshall testified that his mother Elaine Marshall earned roughly $120 million in dividends per year. She currently owns roughly 15% of Koch Industries stock (Charles and David each own 42% each). This would say based on ownership (assuming all this income from Elaine Marshall was from Koch Industries) that Charles and David Koch would each earn roughly $336 million just in dividends each year from Koch Industries. In total the dividend payout for all of Koch Industries would be roughly $792 million. Doing an analysis from after Fred Koch passed away in 1967 would say that the increase in dividends on average has been 18% per year! This rate seems accurate as in Good Profit the description shows that Charles Koch grew the company from a $27 million company in 1967 to a $110 billion company by 2015 would say the growth rate of the company was on average roughly 19%/year which is similar to the growth rate of dividends.
Koch in the past decade or so has entered into other industries that may provide some increase to the historically low profit margins. The most notable recently is Koch has been lending businesses money. In 2013, Koch invested $240 million into American Greetings (a greeting card company) and obtained preferred stock. Preferred stock is more like a bond in terms of an investment. A company like Koch would lend another company money and then get a fixed return (similar to a bond).When Koch made their investment the company was roughly worth 65% less than it was worth in 1998. At the time CFO Steve Feilmeier said the greeting card business "its revenues are flat to slightly growing" and made the comment of trying to send a text to your spouse on their birthday and see how it works out. In late 2017 Koch invested $650 million in Meredith Corp (Meredith was bidding for Time Inc) and a result secured preferred shares that pay a 8.5% dividend (no voting rights though). Koch also received warrants and options that allow them to convert the warrants and options into common shares.
In 2013 Koch purchased Molex Industries for $7.3 billion. Molex manufactures connectors, wires, cables, and connectors. From the 2013 Molex annual report the company had a net income of $243 million on roughly $3.6 billion of revenue which would mean the profit margin would be ~7% which appears to be higher than historical profit margins the company has had. $7.3 billion is actually a large price to pay for a company that generated $243 million of net income. If you divide the purchase price by the net income it would say it would take roughly 30 years to justify the value of the deal. This SEC fact sheet for Koch Industries shows the company has an average holding period of 20 years for investments.
Koch in 2017 invested more than $2.5 billion for a large stake of Infor and acquired common and preferred shares of stock. In this video, Koch CFO Steve Feilmeier explains why Koch invested in Infor. Infor uses software to help companies mange their inventory, accounting processes, logistics, and human resource functions. Georgia Pacific was a customer of Infor which is how the discussions for the investment started. Koch Industries used the investment bank Rothschild for the deal. Koch has part of the deal received preferred stock and common stock in the company. Infor financial statements can be found here (the company is highly profitable).
It appears that in the past Koch Industries had low profit margins given their primary business was crude oil gathering and refinery business. Over time though Koch would diversify their business holdings and tried to invest in industries that would diversify Koch Industries and have a higher profit margin. Charles Koch in this interview when asked what his father Fred Koch would think of the company now given the company has expanded into so many different areas Charles said his father would say "Holy mackerel".
Koch through diversifying over time has decreased the overall business risk (since they don't have all their companies in oil/gas). The Koch Industries today is a conglomerate more similar to Proctor and Gamble or Berkshire Hathaway. By taking the average earnings of the company every year $6 billion and dividing that by the revenue $115 billion would say that Koch Industries has a profit margin of roughly 4-5% which is more than double the profit margin the company had in the 1980s. There is no doubt that Charles Koch and his vision have made Koch Industries wildly successful over many decades. The reinvestment of dividends has grown the revenues, net worth, and dividends of the company.
