A company's brand is categorized as an intangible asset: tough to quantify on a balance sheet, but essential to long-term success. The way people feel about a company and its brand can affect demand for its products and services for years to come.
Since brands can be an essential component of competitive moats, investors shouldn't underestimate their importance. It can often be easy to tell whether a company's brand is taking serious punishment. No one should have been surprised that BP's (NYSE: BP) Deepwater Horizon disaster, and the ensuing Gulf oil spill, considerably damaged its image. But it's often far more difficult to determine just how strong a healthy brand might be.
The best and the rest
Happily, there's more than one way to get a grip on this particular intangible. Interbrand, which tracks companies' brand strengths, has released its yearly lineup of the 100 "Best Global Brands." It compiles that list via "a unique methodology analyzing the many ways a brand touches and benefits an organization, from attracting top talent to delivering on customer expectation."
According to Interbrand, three key elements comprise a brand's value:
- Financial performance of the branded products or services.
- The role of brand in the purchase decision process.
- The strength of the brand to continue to secure earnings for the company.
For the 11th straight year, Coca-Cola (NYSE: KO) was the top global brand on Interbrand's list. IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), and General Electric (NYSE: GE) made up the rest of the top five.
Surprisingly -- at least to me -- Apple (Nasdaq: AAPL) didn't show up in the top 10. But it remained a success story at #17, having "increased brand value 37% through carefully controlled messaging and an endless wave of buzz surrounding new product launches." Apparently, Antennagate was just a blip on Apple's brand horizon. (Don't take that as an excuse to get cocky, Mr. Jobs.)
Not surprisingly, BP disappeared from the list altogether in the wake of its major public-relations crisis in the Gulf this year. Toyota and Goldman Sachs (NYSE: GS), which also suffered major image problems, slipped a few spots on the list from their positions last year.
Taking stock of trust
Americans currently suffer a trust deficit regarding big entities like corporations and government. Investing in companies with trustworthy brands (and management) is a defensive measure in these troubled times, even if it's seems like a far more emotional attribute than, say, price-to-earnings ratios, balance sheets, or sales and earnings growth. (Brand, of course, is not the be-all and end-all; it should be weighed alongside the aforementioned metrics.)
A company's future growth relies as much on quality products and services as the overall trust of the marketplace. Consumers like to feel good about the brands they choose, and have valid reasons to be loyal. Metrics like the "net promoter" scores put forth by Harvard Business Review years ago illustrated that companies with more "promoters" than "detractors" among their customers closely correlated with greater sales growth. The increasing prevalence of social media makes these issues more important than ever, since customers can spread good or bad opinions about a company with unprecedented speed and scope.
Lists like these don't account for the quality of a company's corporate governance principles, but investors shouldn't ignore that aspect when assessing a stock's risk. Shareholder-friendly policies suggest corporate managers who aren't just out for themselves. On the flip side, completely self-interested management teams may eventually alienate not only shareholders, but also employees and customers, ultimately destroying shareholder value.
Consumers and shareholders alike need to trust the businesses accepting their hard-earned dollars. Keeping a close eye on managers' behavior -- and the strength and reliability of their brands -- can pay off for Foolish investors.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
