Week 270 - Dividend Achievers Among the Top 100 Global BrandZ

Situation: You know that brand recognition drives sales. And the managers of those highly-recognized companies know that sales will keep rising in almost any economic environment. They’d rather expand operations and buy more advertising space than tidy up their Balance Sheets, which means needing to borrow money at some point to pay the quarterly dividend. If that were to persist, investors and banks would start to withhold cash needed for strategic initiatives. 

But if the brand is strong enough, that day just never seems to arrive. Look at Colgate-Palmolive (CL) and Coca-Cola (KO). CL has negative book value, and KO shares trade at 8 times book value, instead of a reasonable 2-3 times book value, which is enough to account for intangibles (brand value, patents) and appreciation of items carried on the books at cost (property, plant and equipment).

Mission: Determine the importance of brand value vs. a clean Balance Sheet in protecting stock prices during a Bear Market.

Execution: Assemble a list of companies sponsoring the strongest global brands, specifically US companies that have raised their dividend annually for 10+ yrs (Dividend Achievers). Assess their Balance Sheets and growth trends; calculate Net Present Value (NPV) of purchasing each company’s stock.

Administration: We’ll start with the 100 Top Global BrandZ list for 2016. Brand rank and brand value for each of the 18 Dividend Achievers among them are summarized at Columns AC-AE in the Table. We compare long-term total returns in Column C (i.e., since the Vanguard Balanced Index Fund started trading on September 28, 1992) with 6-yr total returns during the 6-yr “sub-prime crisis” in Column D. We chose that “risk” period because the Case-Shiller Home Price Index (1890 = 100) peaks at 198.01 in the first quarter of 2006 and falls to a trough of 113.89 in the first quarter of 2012. That original index now has a value just over 160 but it has been sold and is now called the S&P CoreLogic Case-Shiller US National Index. The new index is normalized to have a value of 100 in January of 2000 (instead of 100 in 1890). That resets the “old” values given above to 183 for the peak in the “new” index, 140 for the trough, and 180+ for the current value. 

Home prices relate to brand values because both tend to be driven by the spending habits of high net-worth individuals. 

The US stock market has recovered even faster than home prices to reach all-time highs. The cyclically-adjusted price earnings ratio (CAPE Index) has only been this high 3 times in the past century (1929, 1999 and 2007), which is a matter of concern to the US Treasury economists. Why? Because it correlates with other predictive metrics that have also reached historic extremes.  

Our goal is to see which of the 18 companies performed better during the 6-yr crisis vs. the 24-yr period overlapping the crisis. We then examine the Balance Sheets of those companies, by using the same 4 ratios that we have used in recent blogs (see Columns Y thru AB in the Table) to see whether those resilient companies make a habit of keeping a clean Balance Sheet.  

During the 2006-2012 crisis, 6 of these 18 companies outperformed their 24-yr total return records: McDonald’s (MCD), YUM, Nike (NKE), International Business Machines (IBM), Coca-Cola (KO) and Verizon Communications (VZ). However, VZ, YUM and MCD have credit ratings of BBB+ or lower, which indicates that S&P auditors have identified Balance Sheet “issues”. NPV calculations are based on long-term rates of price appreciation and dividend growth. Those calculations show that 3 of the 6 “out-performers” (NKE, MCD and YUM) are among the 4 most rewarding stocks to own out of the 18. But NKE is the only one to be found among the 5 companies that have a clean Balance Sheet (NKE, COST, MSFT, WMT, FDX). 

Bottom Line: Managers of companies with strong brands don’t have to worry much about credit ratings. Why? Because a strong brand is worth tens of billions of dollars; so, an investor or loan officer can always be found. Look no further than Yum! Brands (YUM at Line 3 in the Table). It has a sub-prime S&P credit rating (BB) vs. an excellent S&P stock rating (A+/M).  

Risk Rating: 5 (where Treasuries = 1 and gold = 10)

Full Disclosure: I dollar-average monthly into XOM, NKE, MSFT, PG and T, and also own shares of CVS, KO, WMT, and MCD.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 25 in the Table. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for 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 in the Table. Price Growth Rate is the mean 16-Yr CAGR found at Column K in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx). 

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Week 202 - Dividend Achievers with Growing Brand Recognition

Situation: Brand recognition is the secret sauce of a company's competitive advantage. It doesn't show up in core earnings or tangible book value, but does contribute powerfully to the markup in price (above market) that an acquiring company must offer before it can hope to succeed in a completing a merger or acquisition. The acquiring company books the markup (what it paid for the brand) as "goodwill" and recognizes it as an intangible asset.

Several organizations attempt to assign a dollar value to brands, and issue annual rankings. Brand Finance is one such organization, and just came out with its 2015 rankings for the “Global 500”. Their #1 Brand for both 2014 and 2015 is Apple, a brand they currently value at $128 Billion. We have looked through their list, finding that 20 Dividend Achievers improved their rank in 2015 vs. 2014 (see Columns K-M in the Table). You’ll remember that "Dividend Achievers" is what S&P calls companies that have increased their dividend annually for at least the past 10yrs. Some of the companies listed in the Table have more than one ranked brand, in which case we’ve presented metrics for the brand that improved the most. 

The Table also contains data from the BMW Method website for the past 16yrs (see Columns P-R). By scanning across the spreadsheet, you’ll see that Wal-Mart Stores (WMT), Nike (NKE) and PepsiCo (PEP) look like good choices for investment. We suggest that you dollar-cost average your investments and do it online. Direct Stock Purchase Plans that incorporate a Dividend ReInvestment Plan (DRIP) are available for each of those stocks.

Bottom Line: It is difficult to measure brand recognition but much depends on it. For example, a stock’s price will often change 5-10% over a short period of time because of a change in how its brand is being perceived (i.e., Monsanto). That is why Peter Lynch encouraged people to “invest in what you know” and liked to talk about the stock tips he’d gleaned from listening to comments his wife Carolyn made after shopping. Peter Lynch ran Magellan Fund at Fidelity Investments from 1977 to 1990, achieving a Total Return of 29.2%/yr. I only became successful at investing after reading his book “One Up on Wall Street” in 1990. 

Risk Rating: 5

Full Disclosure: I dollar-average into WMT, NKE, and MSFT, and also own shares of QCOM, KO, XOM, PEP, and PG.

NOTE: Metrics that underperform our key benchmark (VBINX) are highlighted in red; metrics are brought current for the Sunday of publication.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com