Here's a timely question for sports fans: what can baseball teach us about investing? Besides the fun and hope that opening day brings, Major League rosters also remind investors of another great American tradition--diversification.
Over-loading on fast growing stocks, in red-hot industries, is a dangerous strategy. Investors tend to employ this strategy when the market is soaring, as it has in recent years. Companies like Chipotle, Tesla, and 3D Systems, are wonderful businesses, but they will be undoubtedly volatile should the market decline.
During the good times, it's easy to forget what it feels like to see your stocks fall 20% in a week. Tesla is a hot prospect, every team needs one or two, but you also need a few strong utility players on your roster.
That's what McCormick and Tupperware are, they're utility players that offer both growth and safety (albeit with less upside). They can play many positions, growth or income, in your portfolio. Both companies are growing EPS steadily, Tupperware at 15% and McCormick around 10%, over the past five years (annually).
With their portfolios of quality brands, I think these stocks will perform well in most economies. That safety has a value. Should the economy falter, I think spices, beauty products, and kitchen containers will still be purchased (albeit at a modest pace). I can't say the same for cars, name brand clothes, or technology.
Do resilient brands and storied histories make these companies bullet-proof? No, after-all Kodak was once a great brand, but it certainly doesn't hurt.
As the chart above shows, not only have these businesses grown sales consistently over the past ten years, they also saw gains right through The Great Recession of 2008. I don't know if the market will be up or down ten years from now. But I think I do know that both Tupperware, and McCormick, will be selling more of their products than they do today.
McCormick was founded in 1889, Tupperware in 1948, but these businesses barely resemble their founders. Today, these businesses rely on large acquisitions to grow. Tupperware Corporation changed its name to Tupperware Brands in 2005 to reflect its large "Beauty Group" acquisitions, and McCormick saw a string of acquisitions from 2003 to 2008 (including Lawry's). As you can tell in the chart above, both moves were critical to recent growth. New acquisitions, successful implementation, and balance sheet strength, are keys to future growth. While their are risks involved, both of these businesses have proven they're up to the task.
"In the wipeout of 1987, the high-dividend payers...suffered less than half the decline of the general market. This is one reason I like to keep some stalwarts in my portfolio. If investors are sure the yield will hold up, they'll buy the stock just for that. This will put a floor in the stock price."
-Peter Lynch, One up On Wall Street
While dividends alone won't put a floor in a stock, I do agree with Peter Lynch, and feel a safe yield will typically make a stock less volatile. Why does this matter? It's a matter of psychology.
Most investment losses occur because we sell our stocks at the worst times (into panic). At some point, market volatility will rise. The best thing you can do is expect volatility; have a plan to "hold" your stocks in the face of it. Whether for the income, or lower volatility, having a few strong dividend payers in your lineup can keep your temperament long-term and Foolish.
Dividend stability is the key to any great "Utility Player" stock, which is why the pay-out ratio, the percentage of earnings that are paid in dividends, matters.
Luckily both of these stocks appear to have sustainable dividend programs.
Tupperware's pay-out ratio is below 60%, even though it sports a 3% yield. McCormick & Company sports a pay-out ratio around 52%, and a dividend yield of 2.2%. Both companies have increased their dividends, in excess of 10% annually, over the past five years. Given that buffer, earnings could stagnate for a bit before either company were forced to make a dividend cut.
I think these stocks are safe, but they're not "buy and forget" investments.
Tupperware is expanding aggressively internationally, with 65% of its revenues now coming from emerging markets. If you buy this stock, look for the international sales to grow double-digits, and mature markets to hold steady.
McCormick has achieved much of its growth through acquisition. Future acquisition success, and continued implementation of the recent Wuhan Asia-Pacific Condiments acquisition, are critical. Trouble signs in either area, could be a reason to sell.
Diversification: your ticket to Cooperstown
Just as high-priced free agents and bloated payrolls don't lead to baseball success, a "team" of all hyper growth stocks will not lead to a winning portfolio. This is particularly true when the market turns volatile (which is inevitable).
In baseball, a healthy team has a mix of high-paid superstars, promising prospects, and strong utility players. Your portfolio is no different. By staying diversified, and appreciating the importance of these "utility player stocks," your portfolio will be ready for prime-time.
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Adem Tahiri has no position in any stocks mentioned. The Motley Fool has the following options: short April 2014 $90 puts on Tupperware Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.