Thursday, July 22, 2021

The Illusion of Choice in Consumer Goods

One of my favorite charts shows a listing of eleven consumer goods companies, and the brands that they own. It reinforces my belief that strong brands grow dividends.

You can view this chart from here:



Source: Brewminate

This illustration shows these massive companies that control large portions of a given segment of the market. While the sheer number of brands creates the illusion that there is unlimited choice, the reality is that just a few brands control what you buy on a regular basis. It looks like there is a lot of competition, when in reality just a few companies control a lot of the brands we purchase. The sheer reach of brands is fascinating. 

This is understandable, given the fact that many companies own brands that target different segments. Many of these companies have established relationships with retailers for shelf space. Many of these retailers value these brands, because consumers expect to see them, and want them. It is a mutually beneficial relationship.

This of course is a result of creating new brands from scratch, as well as decades of consolidations through mergers and acquisitions.

As an investor, I like looking at companies with solid brands that consumers buy on a recurring basis. I also like the consumer goods companies, because they sell goods that consumers would buy even during a recession. I like companies with large brands that have a dominant position, because I believe that a successful company that has been successful for a long time would likely continue being successful in the future.  Having scale is helpful in procuring the lowest per unit costs, as you have centralized marketing, purchasing and distribution. The more successful you get, the more you stack the odds in your favor.

The companies listed in this chart represent some good ideas for further research. They are not automatic buys of course. When I evaluate companies, I generally like to look for:

1) A track record of annual dividend increases

2) Growth in earnings per share over the past decade

3) Growth in dividends per share over the past decade

4) Dividend sustainability

5) Good entry valuation

I like the stability of their business models. These companies do well in a slow but steady way, and navigate near term economic turbulent nicely. While past performance is not indicative of future results, I believe that these companies would still be dominant in the next 50 years. If you are reading this in 2071, please let us know how this prediction turned out.

The companies included in the chart are:

Coca-Cola (KO) is a beverage company that manufactures, markets, and sells various nonalcoholic beverages worldwide. 

The company is a dividend king with a 59 year track record of consecutive annual dividend increases. Over the past decade, Coca-Cola has managed to grow dividends at an annualized rate of 6.40%.

The stock sells for 25.53 times forward earnings and yields 3.01% today.

Unilever (UL) operates as a fast-moving consumer goods company. It operates through Beauty & Personal Care, Foods & Refreshment, and Home Care segments.

Unilever is an international dividend achiever, which has increased dividends for 25 years in a row. Unilever has managed to boost dividends at an annualized rate of 7.20% over the past decade.

The stock sells for 20.33 times forward earnings and yields 3.43% today.

PepsiCo (PEP) operates as a food and beverage company worldwide. The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region. 

The company is a dividend aristocrat with a 49 year track record of consecutive annual dividend increases. PepsiCo has managed to boost dividends at an annualized rate of 7.80% over the past decade.

The stock sells for 25.04 times forward earnings and yields 2.76% today.

Kellogg's (K) manufactures and markets ready-to-eat cereal and convenience foods. The company operates through four segments: North America, Europe, Latin America, and Asia Middle East Africa.

The company is a dividend achiever with an 18 year track record of consecutive annual dividend increases. Kellogg's has managed to boost dividends at an annualized rate of 3.90% over the past decade.

The stock sells for 15.94 times forward earnings and yields 3.58% today.

Mondelez (MDLZ) manufactures, markets, and sells snack food and beverage products worldwide. 

The company was formed in 2012, when Kraft Foods split into two. Mondelez has managed to increase dividends annually since the split. Over the past five years, Mondelez has managed to increase dividends at an annualized rate of 12.80%.

The stock sells for 21.94 times forward earnings and yields 1.97% today.

Johnson & Johnson (JNJ) researches and develops, manufactures, and sells a range of products in the health care field worldwide. It operates through three segments: Consumer Health, Pharmaceutical, and Medical Devices.

The company is a dividend king with a 59 year track record of consecutive annual dividend increases. Over the past decade, Johnson & Johnson has managed to grow dividends at an annualized rate of 6.60%.

The stock sells for 17.47 times forward earnings and yields 2.54% today.

Nestle (NSRGY) operates as a food and beverage company. 

Nestle is an international dividend aristocrat, which has managed to increase dividends annually since 1995. It has managed to boost dividends over the past decade at an annualized rate of 4%. Check my analysis of Nestle for more information about the company.

The stock sells for 26.07 times forward earnings and yields 2.38% today.

Procter & Gamble (PG) provides branded consumer packaged goods to consumers worldwide. It operates in five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care.

The company is a dividend king with a 65 year track record of consecutive annual dividend increases. Over the past decade, Procter & Gamble has managed to grow dividends at an annualized rate of 5.20%.

The stock sells for 24.96 times forward earnings and yields 2.48% today.

General Mills (GIS) manufactures and markets branded consumer foods worldwide. The company operates in five segments: North America Retail; Convenience Stores & Foodservice; Europe & Australia; Asia & Latin America; and Pet. 

General Mills has increased dividends for 1 year. The company lost its status of a dividend achiever in 2018. This ended a 15 year streak of consecutive annual dividend increases. Over the past decade however, it managed to grow annual dividends at a rate of 5.95%.

The stock sells for 16.29 times forward earnings and yields 3.36% today.

Kraft Heinz (KHC) manufactures and markets food and beverage products.

Kraft Heinz was formed from the merger of Kraft Foods and Heinz. Sadly, the company cut dividends a few years ago, and has kept them unchanged. Kraft Foods had split into two in 2012, and had managed to increase distributions for a few years before that.

The stock sells for 14.80 times forward earnings and yields 4.07% today.

Mars Inc is a privately held company. It's owned by members of the Mars family.

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