A lot to like about consumer staple stocks
There is no secret, that Tobacco has been an incredibly profitable investment for centuries. Producers of cigarettes, in particular, have been huge wealth builders. Just looking at the company history of Altria Group or British American Tobacco (BAT) and at their dividend track record is extremely interesting. These companies have been confronted with a secular demand decline, huge litigation costs in the amounts of tens and tens of billions, and yet they still managed to increase their cash flows consistently over time.
Why have the five largest tobacco companies been so successful?
There are a couple of factors that led to a kind of oligopoly with very few extremely dominant players in an industry with relatively high entry barriers, mostly due to high regulations. Their capital-light business model set these companies in a position to put excess cash generation to work in a very effective way by cutting costs, buying back shares (which puts EPS-growth literally on steroids), and acquiring smaller competitors which led to an industry consolidation rarely seen in other sectors.
But the Tobacco Giants show first signs of weakening profitability. Sales declines can still be to some extent cushioned by price increases and efficiency gains, but regulatory headwinds and also the moral aspect makes tobacco investments riskier and riskier. Decades ago, one could count on the fact that (temporary) book losses on their tobacco stocks will be handsomely compensated through ever-growing dividends which – when reinvested – set a turbo compound effect in motion. Today, even a giant like Imperial Brands (it’s the smallest of BIG TOBACCO, but still ranks number 5 worldwide) had to cut its dividend by one-third amid the COVID-19 pandemic. Granted, with bars and restaurants being closed all over the world, cigarette consumption, in particular of “weaker” brands, is muted. But the long-term trend is clear and it’s leading downwards.
So, for Dividend Growth Investors, is there an alternative to consumer staple businesses, that show similar strengths like Tobacco Company but far fewer moral issues and much weaker secular and regulatory pressure?
Yes, of course. Just look at soft drink businesses (Coca-Cola, PepsiCo), alcool investments (Brown-Forman, Diageo, Heineken, etc.), or exposure to coffee for instance (Starbucks, Nestlé, etc.). There are giants that created intergenerational wealth and they are likely to continue to do so in the future.
But there is one particular consumer staple segment I find extremely interesting which really stood the test of time in terms of stability, consistency, and profitability: I am talking about investments into CHOCOLATE.
There is a variety of businesses that allow investors to take exposure to that industry such as the world’s largest chocolate producer Berry Callebaut or even better: specialized businesses with tremendous brand power like Lindt & Sprüngli and Hershey.
With one Lindt & Sprüngli stock trading for almost USD 100’000 (yes, you read correctly) and participation certificates for almost USD 10’000 each, this company is understandably not the first choice for small investors. But the product quality, price power, brand domination sets it in a position of itself.
Let’s have a look at Hershey
Hershey is much more knowledgeable in particular with US investors, shows similar qualities, and has a much more affordable stock price (I am talking here about the nominal value in USD, not Price Earning Ratio, etc.).
In my view, this US chocolate company shows qualities that are just indispensible for any long-term oriented dividend portfolio. It’s a stock one should hold for decades. It’s an investment for life.
For decades, Hershey offered high returns on equity which led to long-term wealth creation. Having a look at Hershey’s financial fundamentals and you will see, this company is special.
Like many high-quality consumer staple companies, Hershey stocks are rarely getting really cheap. It’s a position you want to have on your watchlist and take advantage of any major price decline. Embrace stock market corrections providing rare opportunities to buy consumer staple stocks of wonderful businesses at reduced prices. Smart investors of course know the quality of the Hershey stocks, so just be patient to find a nice entry price.
Hershey has boosted its shareholder payouts for decades. Just let’s assume having reinvested dividends for over a decade, you really see the beauty of the compound effect. Over the long term, the magic happens with such stock positions.
Hershey’s stock increases the quality of an investor’s portfolio, giving stability and providing an ever-increasing stream of fresh cash that can be put to work again and again. One can reinvest dividends into the same Hershey position or buy consumer stocks of other businesses, but be aware: there are not many businesses that play in that league.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.