Monday, May 28, 2018

2018 Dividend List - Part 3

The third part of this year's list consist of consumer names that we know really well. P&G, Harley Davidson, Unilever, Kellogg, Pepsico, Campbell Soup and our very own Thai Beverage. These are truly global household names and we should really have some in our portfolios. It is very rare for them to be featured here, all in the same year. Again, this is a reflection of the market's one sided view that internet, gaming and FAANGs will conquer the world and become Masters of the Universe!

Dividend List Part 3 of 4

On the flipside, non-tech stocks are now deemed next to worthless and hence we see all these great names all being screened out - a rare phenomenon. Some of these names might have issues, for example, Kellogg and P&G had been mismanaged for years and hence seeing very slow growth. But they are still compounders, both stocks had compounded at low single digits for a few years and if and when they find the impetus to improve, usually with a maverick CEO at the helm again and pushing for change, the stock would again become high single digit compounders.

In our own beloved Singapore market, we have Thai Beverage. This is one powerhouse that has compounded seriously. In 2010, Thai Beverage had a S$5bn revenue and S$450m in net profit. Its market cap was S$7bn and it was ranked somewhere in the teens or even in the twenties in terms of market cap. In 2018, it is forecasted to generate S$9bn in revenue and S$1.2bn in net profit, a 3x increase since 2010. Its market cap hit S$24bn at its peak and it became the largest foreign stock listed on the SGX. With restructuring of its group including F&N and its businesses in IndoChina, there could be further upside, The stock trades at c.5% FCF yield today with FCF at S$1bn and market cap at $21bn.

The stock worth highlighting today though is Campbell Soup. The slide below taken from Campbell's investor presentation deck tells the story well. Campbell today is not just a soup company. While that business segment (American Simple Meals and Beverages) contributes the bulk of operating earnings and has the highest margins, the actual Campbell soup business is pretty small. The segment itself includes sauces and dips with brands like Prego and Pace. It also has organic drinks, energy beverages and other brands acquired over the years. With its portfolio of brands, Campbell dominates the American simple meal and soup market which explains its 26% operating margin.

Campbell Soup Businesses

The two other segments are the future growth engines. Campbell has done extensive survey and research showing that the US consumer (and likely global consumers) are going for more organic and more fresh meals but at the same time, they are also snacking more, albeit with "healthier" snacks like better-for-you biscuits and potato chips. Hence the two segments: Global Biscuit and Snacks as well as Campbell Fresh are seeing strong growth that would provide the compounding effect for Campbell. The market thinks that this would take a lot of time, given that these segments are smaller and also lower margins. But that is exactly where a value investor comes in, when others are fearful!

As this post was in the writing, the stock crashed more than 10% as its CEO Denise Morrison resigned, taking responsibility for failed M&As that she conducted in the past few years, including paying almost $5bn for Synder's Lance. She was also criticized for pursuing contradictory strategies of growing fresh and healthy food while buying more snacks companies. Well, we all love to eat healthy but we just can't give up on potato chips and doritos right? So, Denise was right. But I guess she got played out by politics or was just plain unlucky. Meanwhile, the new CEO Keith McLoughlin and new COO Luca Mignini announced a new restructuring to overhaul the company, focusing on new growth segments (which likely include snacks too!). To this end, the company will form an "accelerator unit" to target selling healthy food (and snacks) via e-commerce.

Restructure, overhaul and upgrade are some of the best investment stories around. The next few months would provide important data points to see if Campbell's plan is really working. The downside is that it fails, but because the stock is so cheap, it would likely just stay flat, although it could be a value trap for a few years. But if the restructuring works, this stock would be up 50-100%! Huat Ah!

This author does not own Campbell yet!

Post a Comment