Whenever I bring publicly listed food and
beverages (F&B) companies up for stock investment discussions, the reaction
I get is always the same. The typical comments are they have High Price-to-Earnings
ratio, expensive share price per unit, little capital gains left, and the ultra low dividend yields.
Well, there is a good saying that goes like:
“Good stocks aren’t cheap, cheap stocks aren’t good”. Perhaps those who dismissed
a good F&B company might have judged the company based on the trailing
price, yield and valuation ratios without even understanding the business of
the company and its future prospects first.
Let me show you why, great F&B companies are
stocks that you can hold on in your portfolio forever!
1. Stable Year-on-Year Revenue Increment
How is it possible that companies like Nestle
Malaysia Berhad (Nestle Bhd), Carlsberg Brewery Malaysia Berhad
(Carlsberg Bhd) and Heineken Malaysia Berhad (Heineken Bhd) can start revenue
growth trends that just go on and on?
Well for starters, all three companies are in
the food and beverage business. Food and beverages are the key necessities in
life for us. No matter what happens, we still need to eat and drink. All these
three companies operate in an almost “sure-win business” model. When human
population increases, their sales would automatically increase year on year!
2. Recession Proof
Above is the Kuala Lumpur Composite Index (KLCI) chart from the year 2008 till year 2019. Notice the drastic dip from 2008 and 2009? Do you remember what happened?
It was the global financial crisis which led to many recessions around the world.
During that period, share prices across markets tanked.
The smell of blood was on the streets as bearish news drove down the prices of
stock markets around the world.
But did that crisis affected the revenue of
Nestle Bhd, Carlsberg Bhd and Heineken Bhd?
Surprisingly, it did not!
Sales did not dive following the crisis. Even during
recession, people still need to eat and drink. Other business sectors like
construction companies, oil and gas companies were seriously affected by the recession,
but food and beverages companies were much more resilient. Afterall, people
still have to consume products of these F&B companies. That was why growth
maintained or even grew during the 2008-2009 period for all three companies.
(I am not surprised if depressed shareholders
also started drinking more, which helped drive up Carlsberg Bhd and Heineken
3. High and Stable Gross Profit Margin
All 3 companies have high and stable gross
profit margin. During the last 11 years, all 3 companies recorded a gross
profit margin between 30% to 40%.
F&B companies like Nestle Bhd, Carlsberg Bhd
and Heineken Bhd are able to sell their products at premium prices without
affecting their sales. This is because their products are of high quality with
good branding. Nestle Bhd has strong brands like MILO, KitKat and Maggi under
Beer brewers like Carlsberg Bhd and Heineken Bhd
have strong brands too. Carlsberg Bhd owns Carlsberg, Somersby, Kronenbourg and
Royal Stout; while Heineken Bhd has Guinness Stout, Tiger, Strongbow, and
Anglia under its brand of diverse alcoholic beverages
High quality products will eventually earn
consumer trust and loyalty. So even when prices go up, consumers are still
willing to buy product from the brands that they trust.
4. Cash Printing Machines
Next, we look at the net operating cash flow
trend. Although Nestle Bhd, Carlsberg Bhd and Heineken Bhd have all shown
increased revenue, we want to make sure that their operating cash generation
showed the same trend as their sales growth.
Nestle Bhd, Carlsberg Bhd and Heineken Bhd have all
shown increased net operating cash flow over the past 11 years. In my opinion,
the trend should be able to continue in the future. This is because since food
and beverages are necessity items, we can expect sales growth and higher cash
flow generation as the population of the market increases.
5. Dividend Powerhouses
George Soros, one of the most famous investors,
once said that investment should be boring. So does Paul Samuelson, another
great investors whom I greatly respect, thinks that good investment is akin to
watching paint dry.
The three companies have certainly proven that with their investment returns. Over the course of 11 years, all 3 companies have increased their dividends per share significantly.
Imagine buying a stock in year 2008 and you did nothing
else over the past 11 years. Yet, you continue to enjoy and receive increasing
dividends every year.
It is definitively boring… But this is the right
type of boredom for me.
Out of the many types of businesses listed as
publicly traded companies, food and beverages companies also seems to have
another defensive characteristic. So far, most of them have been relatively safe from technological
That might be why the great Warren Buffett also
loves good F&B companies. Fun fact, he, through Berkshire Hathaway, owns
shares in Coca Cola Co., Kraft Heinz Co., & Mondelez
What other great F&B companies that you know
of? Let us know in the comments section below!
Ong Joo Parn is the co-founder of MyKayaPlus.com, a website that aims to spread financial literacy to the mass public. It aims to prove that financial freedom is possible through hard work and determination, even though without a degree in finance and accounts. Being a Malaysian based in Singapore, has allowed him to see the beauty not only from both stock markets, but also any great potentials around the world.