Most of the time, my writings on this site focus on companies with excellent brand names that have a history of creating great wealth for their owners. There’s a reason for that: people will always be willing to pay more money for Colgate toothpaste than a generic store version (and that price differential is what creates shareholder wealth), and companies with brand-name protection generally don’t get crushed by inept management because the brands generally sell themselves (thus making companies with strong brands a strong ideal for those interested in intergenerational wealth transfers).
Of course, there are a lot of ways to make money in this country, and there are companies that, while they don’t have a brand-name product to sell, they do occupy a nice very well and create sustainable long-term profits for their owners.
Two such examples are McCormick and Sysco.
McCormick seems about as unsexy as a business can be, selling seasoning, flavoring, and spices. The company has such a dominant position in its niche, however, that it doesn’t face a whole lot of competition—there aren’t a whole lot of recent college graduates that want to be the proverbial saltshaker of the spice industry, changing the pepper we put on our fries in a way that the world will never be the same. The premise of the company is simple: people are going to want to enhance the taste of the food they eat, and we are the lowest cost producers in the industry because we have the unmatched economies of scale in the industry, and so we’ll just keep delivering salt and pepper to people over and over again, making our shareholders richer in the process.
You can see the results for yourself. Over the past twenty years, a $10,000 investment in the S&P 500 would have grown into $59,600 with dividends invested. McCormick, meanwhile, clocked the S&P 500 over that same time frame. We’re talking Liston beats Patterson bad, here. An investment in McCormick would have increased your net worth in the stock twelve-fold over the past two decades, giving you twenty-two cents in annual dividends now for every dollar you invested way back then.
What’s the McCormick secret? There are no down years with that company. Every single year since the mid-1990s the company has increased its profits on a year-over-year basis, allowing investors to achieve rapidly increasing valuations and dividend payouts as the economic engine of the company chugga-choo-choos forward year after year. The company is definitely niche; I’d guess 99% or more of the people you’d meet on the streets have never heard of it, yet the dollars and dollars of wealth that gets created from McCormick spends just as the same as the wealth created from the bluebloods like Procter & Gamble, Johnson & Johnson, and Nestle, to name a few.
Sysco is another example of a company that people don’t necessarily think about all that often from an investment perspective, yet delivers returns that outpace the S&P 500 over the long haul. If you run a hotel, hospital, prison, university cafeteria, or nursing home, there is a very good chance that you are getting your food and supplies from Sysco. Their distribution scale is so expansive that they can keep their own internal costs low and occupy a dominant position in the market.
The payout ratio for the dividend has crept up a bit in the past few years, and the rate of earnings per share growth has slowed down to 3% over the past five years, but I see it as an opportunity for investors to get a decent price today because the relatively unimpressive immediate past has put a lid on its valuation a bit. Sales have been growing at 7.0% the past decade, and eventually, Sysco will be able to convert those sales gains into 8-10% annual earnings per share growth in line with its historical tradition of doing so. The company has been overhauling its fleet and paying substantial legal fees in connection with the attempted merger of US Foods, which should come to an end within the next year or two.
As for Sysco’s long-term results, the company has outpaced the rest of corporate America by 2.3 percentage points annually over the past decades. How much do those two points matter? An investor with $10,000 invested in the S&P 500 ended up with almost $60,000 whereas the Sysco investor is closing in on $90,000.
Why did I write this article? To point out that these are the kinds of companies that you diversify into once you got the basics out of the way. If you want to own thirty, forty, fifty stocks, companies like McCormick and Sysco are where you look to after you get the Coca-Colas and Johnson & Johnsons purchased—there are companies that allow you to diversify without diworsify. They’re not flashy, they’re not known to the general public, and they may not even be at the top of your portfolio’s total returns, but they are the hosses on the farm doing the dirty work that no one else wants to do, silently putting more and more greenbacks into your pocket year after year.
Originally posted 2014-05-30 16:16:35.