Roche’s spin-off jewel Givaudan

Short term, stock markets are a popularity contest

In 2000, in the midst of a huge tech-driven bull market, Swiss pharmaceuticals giant Roche announced that it would spin-off its fragrances and flavors division, creating a separate company to be publicly listed on the Swiss stock exchange under the name Givaudan.

Roche, a company with an impressive track record of consistently growing its free cash flow and dividend payouts since 1988 handed out to its shareholders one Givaudan stock for each Roche share.

That “special dividend” was extremely generous given the fact that Roche continued its progressive dividend policy and Givaudan has hiked its shareholder payout since its start as an independent company in 2000.

Roche resp. its shareholder had decided to spin off its fragrances and flavors division in order to concentrate on its drugs, diagnostics, and vitamins businesses. Roche became more focused on higher-margin businesses and products. But still, let’s bear in mind that through the separation of Givaudan, the parent company Roche “lost” almost 20 % of its revenues and more than 10 % of its profit contribution. So, again, it’s really astounding, that Roche has been able to show such solid financials for decades and is one of the strongest and most reliable dividend payers in Europe.

The market value of Givaudan was roughly USD 4 Bn. when it was spun-off and it has increased more than tenfold since then.

These are massive returns in particular factoring in the accumulated dividends.

A stock increasing its market value like that compares favorably with having taken a stake in Amazon in that same time period.

Holding shares of a company like Givaudan that had been handed over to its shareholders in 2000 has been an incredible gift, and every stock owner who held to his or her position trough thick and thin has been rewarded handsomely. Long-term oriented, patient, and optimistic investors are always the beneficiaries of wealth creation through their multi-decade holdings in exceptional businesses.

But what’s particularly interesting is the fact, that at that time in 2000, when tech exchanges like NASDAQ and Neue Markt (in Germany) had climbed astronomical heights the so-called “old economy stocks” were seen as «boring companies». Some even questioned whether “old economy businesses” would even play a role in the future.

Just think about that: in 2000, stocks of wonderful businesses such as Nestlé, Coca Cola, Roche, Johnson & Johnson – and also Givaudan – didn’t really participate in a huge bull market, that at the core just focused on tech companies or businesses that at least gave the impression to be part of a «dot-com-hype».

Today, big techs such as Microsoft, Apple, Amazon, Facebook, Alphabet, NVIDIA, etc. of course are omnipresent. But let’s look at Givaudan. That company in 2000 instantly became the world’s leading independent flavors and fragrances manufacturer. The company is claiming to touch people’s lives ten times per day through different products like food, beverages, and fragrances, or laundry care. In its niche, Givaudan is even more omnipresent and dominant than tech giants.

“Old” and “boring” companies can make excellent investments. Givaudan has a 225-year history, part of the company root back to 1800 when they started as perfumery companies.

In the long run, stock markets are a weighing machine

As said, around twenty years later after its listing as an independent company, Givaudan is a USD 45 Bn. Market cap company. Its stock price not only increased tenfold but what’s even more interesting is the amazing dividend history of that company.

Since the Company’s IPO in 2000, Givaudan has created over USD 40 billion of total shareholder return, with an average annual yield of 13.3% compared with 4.1% for the SMI Index in the Swiss market. The dividend has risen year on year, reflecting the company’s commitment to returning cash to shareholders.

However, in the last five years, dividend growth slowed down, and the company increased the dividend only by 3.5% each year. It’s the same by the way with Roche. But slowing dividend growth per se is nothing to lament about.

But intelligent investors keep their winners and over the last years, stock market participants have recognized Givaudan’s huge economic moat. It’s a company with a dominant position in niche market, giving the company pricing power. A broad economic moat and the resulting defensibility of a company against competitors is extremely important

Givaudan is reporting in two different segments:

  • Fragrance & Beauty: This segment includes business units like “Consumer Products”, “Fine Fragrances” and “Fragrance Ingredients and Active Beauty” and generated CHF 2,924 million in sales in fiscal 2020 (an increase of 4.5% YoY). This unit has clients such as L’Oréal, Louis Vuitton Moet Hennessey (LVMH), Procter & Gamble etc.
  • Taste & Wellbeing: This segment includes business units like “Sweet Goods”, “Dairy”, “Beverages”, “Savoury” and “Sciences and Technology” and in fiscal 2020, this segment generated CHF 3,398 million in sales (a decrease of CHF 6 million compared to fiscal 2019). This unit has client like Nestlé, Unilever, Danone etc.

Conclusion

Stock prices reflect the quality of a business over the long haul, as can be seen in so many instances over and over again.

But over shorter time periods, markets can grossly underestimate the economic moat, growth potential and financials even of a wonderful business. These are rare occasions to take a stake in a great business for a wonderful price.  

It’s crucial, as a retail investor to

Disclaimer
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.

About Savy Fox

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