Form is temporary, quality is permanent
[This article is written by Duggan Matthews – Investment Professional and Chief Investment Officer at Marriott Asset Management. It was originally published in Personal Finance on 1 August 2019.]
2018 proved to be a volatile year for most sectors but none more so than consumer staples. Despite being home to a number of the world’s most iconic companies, the sector declined by more than 12.5% in the first 5 months of the year. The share price of Procter & Gamble – the world’s biggest consumer company – fared particularly poorly, declining by more than 20%.
The large declines in the share prices of companies like P&G, Unilever, Coke, Nestle and other leading branded-goods manufacturers were explained by rising bond yields and mediocre company results. According to the market, the value of their reliable, growing dividend streams had diminished because higher yields could be found elsewhere, and changing consumer preferences threatened dividend growth. A number of market commentators even proclaimed “brands are dead”. Just 10 months later, however, it appears that brands are back. The chart below highlights the recovery of the Procter & Gamble share price from 31 May 2018 to 28 February 2019.
The bounce back in consumer staples (up 23.1% since June) has largely been driven by a realisation that higher interest rates (and hence bond yields) are unlikely to be sustained over the longer term due to an over-indebted financial system. Furthermore, recent company results have been encouraging. For instance, Coca-Cola reported a 5% increase in net revenue to $8bn; organic growth at Nestlé accelerated to 3.4%; and, P&G recorded its highest sales growth in almost 8 years. Underpinning these good results was their ability to increase prices without losing customers – the primary benefit of a strong brand portfolio.
The resilience demonstrated by the likes of Coke, Nestle and P&G should not come as a surprise. These companies have track records demonstrating an ability to grow profits and dividends across multiple decades. The chart below highlights the dividend track record of P&G since 1980.
Consumer preferences would have shifted many times over this 40 year period. Notwithstanding these changes, it is evident that P&G was still able to maintain a relevant portfolio of sought-after brands. Judging by recent results, so too has Nestlé, Unilever, Coca-Cola, Anheuser-Busch, Reckitt Benckiser and other quality consumer staple companies.
Broad, diversified portfolios are one form of protection against shifts in consumer preference. Nestlé for example, manufactures over 2000 market- leading brands. Huge company balance sheets are another, paving the way for the acquisition of younger, promising brands which are then leveraged via global distribution networks. Incumbents are also getting better at rolling out new brands. Coca-Cola, for example, is expanding its namesake brand, pushing forward with rollouts of a coffee-infused variant, and an energy-drink version of Coke. After testing Coca-Cola Plus Coffee last year in Asia, the soda giant now plans to launch it in 25 global markets by the end of this year.
Barriers to entry may have come down for newcomers; however, economies of scale, product diversification and a global reach still offer significant advantages. The biggest advantage being time – time to adapt and thrive in an ever-changing world. As such, investors should continue to expect reliable, growing dividends from these companies in the years ahead. In a world of low interest rates and slowing GDP growth, it is likely that these steady income streams will become increasingly sought after.