Since Heineken founded its brewery in 1873, the thirst for a pint is undiminished, and unlikely to change. Likewise with over a quarter of the global population using its products every day, Unilever’s position as one of the world’s foremost consumer goods companies seems unassailable.
Warren Buffett was talking about Coca Cola and Gillette when he famously labelled this type of company ‘inevitables’. They are firms almost impervious to change despite the complexities of the economy - and capable of growing their profits for years to come.
Inevitables do something today similar to ten years ago - only better. They have great brands and unparalleled distribution that help cement their strength, an economic ‘moat’ around the business that ensures durability and success.
It is not just a phenomenon confined to 'old' economy stocks either. New technology is creating new inevitables such as Paypal, the leading online payment provider.
Finding and owning inevitables is the philosophy at the heart of Nick Train and Michael Lindsell’s approach.
Keeping it simple
Sometimes, investing can appear to be a complicated business. Options, derivatives and fancy algorithms can all have their place, but these strategies can add unwanted complexity and costs to what should be a simple and transparent process.
Nick Train and his co-manager Michael Lindsell have a reassuringly straightforward strategy. They simply aim to identify outstanding businesses, and then become long-term shareholders.
The managers typically look for businesses that are ‘secular, not cyclical’. This means avoiding those susceptible to cycles of boom and bust, instead seeking to identify companies with sustainable long-term advantages, regardless of economic conditions.
Here, I take a closer look at three of the holdings in the Lindsell Train Global Equity Fund, and explore how these companies fit in to the Lindsell Train philosophy. Please note all yields quoted are variable and not a reliable indicator of future income. The value of investments can fall as well as rise, so investors could get back less than they invest.
Unilever’s portfolio of brands includes Hellmann’s, Persil, Ben & Jerrys and Dove. A successful marketing operation means these brands have become increasingly ingrained in everyday life for consumers all over the world.
The group was recently the subject of a £115bn bid from Kraft Heinz, which was backed by Warren Buffett and private equity group 3G. Unilever managed to fend off their advances, and the bid was withdrawn. Nonetheless, Nick Train feels there are still plenty of lessons to be learned.
He recently told us that he sees Buffett’s interest in Unilever as an indication of his desire for increased exposure to emerging markets. While Kraft has a limited presence in these areas, Unilever brings in over half of its revenue from developing economies.
Unilever – returns over twenty years
Past performance is not a guide to future returns
Source: Lipper IM, to 30/06/17
Instability in Brazil might mean the important Latin American market is a difficult one at present, but we’re confident economic progress will prevail over time. An increasingly wealthy population should prove a long-term tailwind, although as we are currently seeing, conditions in emerging markets can be volatile.
After a recent strategy review, the group is targeting higher margins and a bigger dividend, although there is of course no guarantee that this can be delivered. At present, the prospective yield is 2.9%.
As the chart shows, over the long-term the company has delivered exceptionally attractive returns for shareholders – especially if dividends were reinvested. However, there are of course no guarantees this will continue.
View our Unilever factsheet
Another consumer facing company with a strong portfolio of brands is Dutch-listed Heineken. There are no prizes for guessing what the flagship name in the stable is, but the portfolio includes some other stellar names too. Sol, Moretti and Amstel are all part of the group’s €20bn+ of annual sales.
While Heineken clearly has significant clout, it isn’t the biggest fish in the pond. With 4 of the top 5 global beer brands, including Budweiser and Bud Light, the group’s Belgian rival AB Inbev can claim that mantle. However, size isn’t everything.
Heineken’s strategy focuses on establishing and maintaining a premium image for its products. Pitching its beers at the top end appeals to a more aspirational customer, and stronger pricing and an improving product mix has helped profit margins rise consistently.
February’s results saw adjusted operating margins hit 17% this year. Since 1990, Heineken has added an average of close to 0.3 percentage points to margins every year, and it’s aiming to expand these by a further 0.4 percentage points annually in the foreseeable future, although there is no guarantee this will be achieved.
The prospective yield is just 1.7% at present, but analysts expect the payout to rise steadily in the coming years.
View our Heineken Holdings factsheet
The third biggest holding in the Lindsell Train Global Equity Fund is another alcoholic drinks company, spirits giant Diageo. However, in the spirit of moderation, the final company I take a look at here is Paypal, which appears a bit further down the list. While the stock sits in the tech sector rather than consumer goods, it is another that fits firmly into the ‘secular, not cyclical’ category.
You may know it best as the eBay payments system, but Paypal was spun off as an independent listing in 2015. The relationship following the split is governed by incentives for eBay to push business through Paypal for the first five years, so eBay’s marketplace still accounts for around 22% of revenues.
That’s significant, but other areas of the business are growing rapidly so the importance of eBay to the group is declining. In its current incarnation, Paypal can best be thought of as a play on increasingly wealthy consumers buying more, either online or via mobiles.
Revenue is primarily earned through fees for providing transaction processing and other payment-related services. 1.7bn transactions were processed in the most recent quarter, helping the group report $3bn of revenues in the three months to 31 March 2017. However, with Visa racking up over 80bn transactions last year, this hardly represents a big slice of the pie. There should be plenty of room for further growth. At present, Paypal is focusing on growing its business, and so does not pay a dividend.
View our Paypal Holdings factsheet
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
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