Chasing the elusive taste of success
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Popular brands inspire consumer loyalty and are more likely to survive yo-yoing markets. But the number of strong assets available on the British stockmarket are few and ever dwindling.
Nick Train is a director of Lindsell Train and investment manager of the Finsbury Growth & Income Trust
As the Cadbury/Kraft bid battle rumbled on last year, one of those wonderful “what if” statistics caught my eye.
What if in 1964 you had chosen to invest £1,000 into Cadbury shares? Then, what if you had held that stock for the subsequent 45 years, through bull markets and bear, booms and busts, ruling politicians of every hue? Next - here is the really unlikely bit - what if you had reinvested every penny of annual dividends received into new Cadbury shares? If you had done all that, what would your £1,000 have been worth by September 2009, the day before Kraft made its preliminary approach?
The answer is £290,000. A return we estimate to be three to four times better than that of the FTSE All-Share index over the period.
This begs three questions - questions to which we do not have ready answers. However, thinking about the possible answers might make you a better investor. (article continues below)
First, we wonder how many other British companies quoted back in 1964 generated as much wealth as Cadbury in subsequent years. More to the point, how many, say, British engineering companies, textile mills or coalmines even survived the ensuing near half-century as quoted entities? Analysis of stockmarket indices confirms that one of their notable features is the disconcertingly rapid and wholly ruthless extinction of their constituent industries and companies over time. The sort of durability exhibited by Cadbury is the exception, not the rule.
Next, what was it about Cadbury that helped it excel? Of course, Cadbury grew - confectionery has proven a steady if unspectacular growth category. But just as telling must have been the inflation-proofing its owners enjoyed. Since 1964 successive British governments have debauched sterling, inflicting ruinous loss of purchasing power on any saver imprudent enough to rely on cash deposits or fixed interest assets. Meanwhile, Cadbury’s brands proved sufficiently resonant with British consumers for the company to nudge up the price of Dairy Milk or Sharps Extra Strong Mints, in line or ahead of inflation. What is more, even with the benefit of hindsight, it is not so hard to have predicted that such well-loved products would have commanded consumer loyalty - and therefore insensitivity to price rises - over the decades.
Perhaps the best single piece of investment advice ever offered to me came from a former boss: “If a company’s products taste good, buy the shares”. Cadbury’s story confirms his wisdom. Broader confirmation comes in Jeremy Siegel’s book, “Stocks for the Long Run.” He notes that of the 20 best-performing shares in the original Standard & Poor’s 500 index (first calculated in 1957) over 50 years to the end of 2006, 12 were consumer brand owners whose products “taste good”, for instance Coke, Colgate and Heinz. (Another five of the 20 were healthcare companies, often selling trusted over-the-counter medications, which are consumer brands too).
”If a company’s products taste good, buy the shares”
So, in an uncertain world, the closest it is possible get to a certain investment proposition is that well-entrenched brands will generate competitive stockmarket returns. But here is the rub. The number of “Cadbury-type” assets available to investors in the British stockmarket is few, and dwindling further with each takeover.
Interbrand, a global brand agency, releases an annual survey of what it calculates to be the world’s 100 most valuable brands. The 2009 ranking makes depressing reading for a British investor. According to Interbrand, only four of the world’s leading brands are owned by companies with their primary listing in London - namely HSBC, BP, Smirnoff (Diageo) and Burberry - compared with 51 for America, and 11 for Germany. British investors do not seem to care. On the eve of Kraft’s bid - at a time when the London market was gung-ho about more or less speculative mining and oil exploration companies, active in more or less unstable domiciles - only 28% of Cadbury’s shares were held by domestic institutions.
Our awareness of the scarcity and the scarcity-value of British-listed consumer brand owners brings me to my third and final question. What price will Diageo shares be in 45 years’ time? We contend that they will be much higher than today. Diageo will grow steadily, as its great-tasting products lubricate the world. But some time, too, Sir John Templeton’s iron rule will be confirmed: “All government deficits end in inflation”. At that point, the inflation-proofing that comes with proportional ownership of the earnings of Smirnoff, or Baileys or Guinness will be of incalculable benefit to its shareholders.
On the back of an envelope we estimate that if Diageo were to perform as well as Cadbury, its shares would rise from about £11 today to over £3,000 each. Does that seem implausible? Well, a bottle of Johnnie Walker Black - a brand first distilled 190 years ago and still growing strong - says it will. If I am wrong you can collect off me in April 2055.
