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 Bhd’s sales!)
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 its portfolio.
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.
Interesting Fact: I had a close friend (he passed away sadly in year 2018). He was an ex-Nestle Bhd employee, who held onto his employee shares given to him when Nestle Bhd IPO-ed in year 1989 for a price of RM5.20 a share. Up until 2018, his capital gains + dividends collected from Nestle Bhd since 1989 would have outperformed a lot of investors and professional fund managers. Just to give a rough picture, at current price of roughly RM140 per share, that gives a 27 bagger return on capital gains, and RM2.8 Dividend Per Share gave him a 54% trailing dividend yield based on his initial holding price.
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 disruption.
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 International Inc.
What other great F&B companies that you know of? Let us know in the comments section below!