Investors should be aware of favorable demographic trends and look for companies that exploit these trends. Legendary investors like Warren Buffett have had great success by identifying and investing in these companies.

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By John Del Vecchio (TMF Fuz) and Peter Psaras (TMF Mycroft)
February 13, 2001

One factor that many investors overlook in analyzing a company is the impact of demographic trends on a company's fortunes. When outstanding investors like Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRK.B), bet big on an investment, they ensure that the company exploits favorable demographic trends. This is one of Buffett's simple investing secrets, and it has led to outstanding long-term investment performance.

I'd like to buy the world a Coke
With over 6.1 billion people in the world and the population growing by approximately 95 million people per year, there are plenty of consumers eager to quench their thirst. Coca-Cola (NYSE: KO) is there to satisfy that need. Coca-Cola operates in over 200 countries throughout the world, possesses a superior distribution system, and has one of the most recognized trademarks around the globe. Travel to Vietnam, India, or Venezuela, and you will begin to appreciate the ubiquity of Coke. 

Coca-Cola has done a tremendous amount of research into its customers. Every second of every day, 12,600 people reach for a Coke. Coke makes about a one cent profit per serving, which allows us to estimate that it will make about $11 million a day in profit. Thus, if the population of the earth 30 years from now grows to 9 billion, Coke will be able to fully take advantage of this growth with its superior branding and distribution systems while expanding its profit potential.

Beverage companies are innovators as well. New product innovations such as Diet Coke have created an explosion in consumer demand. Of course innovation can have its pitfalls too -- remember New Coke? However, with varied tastes globally, there is plenty of opportunity to develop new products to further penetrate existing markets while benefiting from long-term growth trends in the population.

Of course, other beverage companies benefit from population growth trends as well. Maybe you would rather take the Pepsi (NYSE: PEP) challenge. Fortune magazine recently honored Pepsi as the most admired company in the beverage industry. Regardless of the whether you prefer Coke or Pepsi to quench your thirst or satisfy your investment needs, 20 years from now, they will both be around. Over time, each company may have its share of problems, but if investors buy great businesses at great prices when few people want to own them, market-beating returns are waiting. Just ask Buffett.

Take two of these and call me in the morning
Pharmaceutical companies also benefit from favorable demographic trends. The population is aging and life expectancies will eventually reach beyond 80 in the industrialized world. As a result, consumers will require more drugs. This trend bodes well for the major drug companies.

Pharmaceutical companies make money by discovering, developing, and selling therapeutic drugs to combat illness. Drug producers also have strong brands, which create stability for their businesses. If your lips are chapped, reach for Chap Stick. If you have a cough, take some Robitussin. If your body aches pop a couple of Advil tablets.

The business models of drug companies generate high profit margins, require low fixed-capital investments, and are defensive investments in rough economic climates. People get sick no matter how much Alan Greenspan raises or lowers interest rates. Leading pharmaceutical companies like Bristol-Myers Squibb (NYSE: BMY) and Merck (NYSE: MRK) have weathered numerous economic booms and busts while supplying breakthrough drugs and hardy profit margins along the way.

Investors should pay close attention to possible regulations, patent protection, and potential litigation as prevalent risk factors. However, the long-term outlook for pharmaceuticals is bright and the industry will benefit from favorable demographics for many years to come.

Like beverage companies, pharmaceuticals have their ups and downs, but most of them will either be around 20 years from now or they will have been acquired. Either way, they are worthy of consideration when they are out of favor and few investors want to own them.

Where to from here?
Beverage companies and pharmaceuticals are just two examples of companies poised to benefit from long-term demographic trends. You may be able to identify many more, preferably when they are out of favor with Wall Street and the investing public. Considering demographic trends may help you identify enduring businesses that are good long-term investments. It's also a valuable tool in your investing toolbox. By the way, if you are specifically interested in the opportunities available in beverages and pharmaceuticals as well as 15 other industries, check out The Motley Fool's Industry Focus 2001.

John Del Vecchio is notorious for his bad timing. At the time of this writing, he did not own any stocks listed in this article. To see his holdings, visit his profile.

Peter Psaras, a.k.a. Mycroft, has been a Fool for a long time but never knew it. At the time of this writing, he owned shares of Coke. TMF Mycroft's online profile shows the stocks he currently owns. The Motley Fool is investors writing for investors.