Let's face it -- picking stocks in volatile market conditions can be as much art as science. Most Foolish investors are bombarded with enough numbers every day to drive any investor screaming toward the index-fund route. At least that way, you can be sure you're not doing worse than the market.
But stock selection becomes a lot easier when you have a plan -- an investment philosophy, if you will. Usually, this involves segmenting your portfolio by risk: keeping most of your hard-earned investment dollars in lower-risk issues (core holdings), with a few carefully chosen highfliers thrown in for upside potential.
I've argued in recent articles that Foolish investors should consider consumer-products companies as their core holdings. Their merits include long operating histories, skillful management, high dividend payouts, international diversification, and less downside risk in a falling market, just to name a few.
The brand's the thing
Assuming that you agree, which consumer-products company is the best? Well, most of these household-name companies would attribute their success primarily to the strength of their brands. Brands drive sales growth and profitability, and these companies spend tons of dollars to build those brands. From Tide to Cheerios, if we believe it's the best product, we buy it. If brands weren't important, we'd be buying nothing but generics.
The nuts and bolts of brand power
Marketers have all sorts of ways to measure brand power, including market share, unaided awareness, loyalty, and attachment rates. But none of these helps investors know which company boasts the strongest brand arsenal. Shouldn't investors truly care about whether a company can translate marketing muscle into superior financial performance for shareholders?
I think so, and in that spirit, I'm offering this point-scale ranking on seven of the largest consumer-products companies:
| Company |
Sales Growth |
Op. Margin |
FCF/Sales |
ROE |
Total Points |
|---|---|---|---|---|---|
|
Procter & Gamble |
12.1% |
20.2% |
13.7% |
16% |
21 |
|
PepsiCo |
7.9% |
18.3% |
11.4% |
38.4% |
21 |
|
Coca-Cola |
4.3% |
26.2% |
18.9% |
29.1% |
20 |
|
Colgate-Palmolive |
7.4% |
18.2% |
11% |
97.9% |
19 |
|
Unilever |
11.4% |
13.6% |
8.8% |
34.4% |
15 |
|
General Mills
|
6.9% |
16.5% |
10.5% |
23.8% |
12 |
|
Kraft |
0.7% |
13.2% |
7.4% |
9.6% |
4 |
Source: Yahoo! Finance.
I call this a financial brand power index. In each of four key financial metrics, it awards between one and seven points to each company, based on its performance relative to the other firms on the list. For example, Procter & Gamble gets 21 total points: seven points for the highest sales growth, six points apiece for being second-best in operating margin and FCF/sales, and two points for holding down sixth place in ROE.
No surprises here
I'm hardly shocked that Procter & Gamble, PepsiCo, and Coca-Cola are clustered at the top of the list. These are three of the most successful companies in history. Among this trio, I might give a slight nod to PepsiCo for having the most attractive trailing-12-month P/E, at 20. But none of the top three are cheap on a relative price basis. You get what you pay for.
Investors might be surprised that Colgate-Palmolive trails Coca-Cola by only a single point. Colgate's rating gets a boost from its astronomical ROE, because it employs more debt in its capital structure. But all its other metrics are solid, too, and while oral-care products may not be sexy, they can really bring home the bacon.
Unilever and General Mills get solid but not spectacular rankings. Unilever is in its second year of reinvention, posting strong sales growth in its most recent quarter. Meanwhile, General Mills seems to have a few Trix up its sleeve, given its excellent international growth last quarter. With a 2.9% annual yield, the stock may be a tasty treat to investors who favor current income for breakfast.
Kraft Foods brings up the rear in this ranking system, placing dead last in all four metrics. While the numbers don't lie, it may be premature to judge the company so harshly. Since its recent spinoff by the Altria Group, the big cheese has been Krafting a growth strategy that's worth watching. Recent interest from Carl Icahn and Warren Buffett is also noteworthy.
It'd be hard to say that Foolish investors could go too far wrong with any of the top six companies on this list over the long haul. Pick your favorite and forget about it for the next few years. These companies have been making money the old-fashioned way for decades.
For more opinions on companies with brand power, check out:
