Sunday, March 12

Week 297 - Sugary Soft Drinks And Milk Lead The Food & Beverage Sector In Sales

Situation: Milk is still the leading category of food expenditures for the 80% of households that pay with cash or credit/debit cards, but the 20% of households that pay with Food Stamps bring sugary soft drink sales up to first place nationwide. Milk is perhaps the single most nutritious food (see Week 254), whereas, refined sugar is the only “food” found in sugary soft drinks. Those drinks are being held responsible for the strong link between poverty and obesity, as well as the strong link between obesity and Type II diabetes.

So, let’s revisit the large and well-established Food & Beverage companies to see which are doing well from an investor’s standpoint. We need to know how much refined sugar contributes to their prosperity, as opposed to milk, those being the top revenue producers. Has publicity about the detrimental effects of refined sugar been effective? In other words, are sugary soft drink sales still rising and milk sales still falling?

Mission: Apply our standard spreadsheet analysis to Food & Beverage companies on the 2016 Barron’s 500 List that have had their stock traded long enough to appear on the 16-Yr BMW Method list.

Execution: see Table.

Administration: We find that 19 companies meet the requirements for size and longevity. But only 8 are Dividend Achievers (see Column AD in the Table), and only 4 of the 16 dividend payers have clean Balance Sheets, HRL, INGR, KO and ADM (see Columns P-R). This tells me that the largest and best-established food companies are struggling. Their managers must be having a hard time figuring out how to grow sales faster than the rate of population growth. A favorite tactic is to have a large advertising budget to promote products that the consumer is expected to like (based on marketing studies). That strategy has pushed Coca-Cola and PepsiCo to the top of the pack, with market capitalizations more than 4 times higher than the next largest food processor: General Mills (GIS; see Column AA in the Table).

Bottom Line: Food & Beverage stocks are thought to be “defensive” because of being in the S&P Consumer Staples industry. However, they’re commodity-related (high risk/high reward) because of being tied to global weather cycles. In my opinion, only 2 of the 19 companies in the Table are sufficiently safe and effective for your retirement portfolio (HRL and KO). Procter & Gamble (PG) is perhaps a better way to invest in Consumer Staples (see Line 23 in the Table).

Coca-Cola (KO) and/or PepsiCo (PEP) dominate sales for sugary soft drinks in every country, even though the sales of such drinks have fallen for 11 yrs in a row, and great efforts have been made to find healthy alternatives. Coca-Cola still derives 70% of its revenue from sugary soft drinks, even though it has diversified into milk (Fairlife), fruit juice (Minute Maid, Simply Orange), sugary vegetable drinks (Suja Juice, Fuze, Odwalla), energy drinks (Monster), and Coca-Cola Life that uses the natural sweetener Stevia. The good news is that the detrimental effects of sugary soft drinks have become well known and consumers expect companies do something about it. Both PepsiCo and Coca-Cola appear to be making every effort to comply, while continuing to rely on the aggressive marketing of sugary soft drinks. In summary, the trendline for sugary soft drink sales is tilting downward while milk continues to fall without pausing.

With regard to milk sales here in the US, the main processor, Dean Foods (DF), almost faced bankruptcy because sales have fallen 30% since 1975. Dean Foods survived by splitting off its most successful subsidiary, WhiteWave Foods, the producer of Horizon Organic milk and Silk soy milk. “The move was designed to get investors to pay more for shares in a business unit with higher profit margins and faster growth prospects than conventional milk.”

Kroger (KR) operates 16 dairies that distribute milk to 34 states, and Coca-Cola (KO) has assembled a large group of dairy co-operatives to produce “ultra-filtered milk.” That new technology separates milk ingredients then recombines those selectively to produce a more nutritious product called "Fairlife," which has half the sugar and twice the protein. Fairlife Milk is distributed to grocery stores nationwide by the Minute Maid division, and is currently priced at an 11% premium to Parmalat Milk in Wal-Mart Stores. Fairlife Milk has been available for less than two years; people who shop with food stamps presumably don’t yet know its benefits and would perhaps shy away from paying the 11% premium price even if they knew.

Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-cost average into KO, and also own shares of HRL and PG.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 28 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K ( Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 33 in the Table. The ETF for that index is MDY at Line 27.

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