Household and personal care is among the most diversified industries. This industry is consistently growing and continually reinventing itself, and as it moves into new markets it's spinning out a dizzying collection of product types: cosmetics, toiletries, detergents, soaps, and wax, along with some pharmaceutical products. Additionally, this industry has faced increasing competition over the years. Therefore, companies operating in this industry are focusing on product innovation to enhance market share along with keeping existing customers happy.
The industry not only has the ability to provide protection in difficult economic times, but also to generate solid profits during healthier times. Though it has faced higher commodities prices in the past five years. Still, it has returned nearly 7.7% to shareholders. In order to sustain growth, household and personal care companies are also making acquisitions. Emerging markets are turning out to play a key role in the ability of these companies to generate sustainable growth, both in sales and earnings. Due to product diversification and extensive market exposure, this industry's sales and earnings streams are comparatively steady throughout the business cycle.
Mid-caps that operate in this industry are showing tremendous potential for sustainable growth. They offer a sensible alternative between large caps and riskier small caps. On average, the mid-tier companies have a market capitalization in the range of $1-$5 billion. In this article, I pick two mid-caps operating in the household and personal product industry: United-Guardian (UG) and Tupperware Brands Corporation (TUP). They both offer attractive dividends with growth potential. I believe that these two mid-cap players have strong business models and the ability to consistently deliver strong earnings.
How United-Guardian Is a Safe Investment
United-Guardian manufactures and markets cosmetic ingredients, pharmaceuticals, personal and healthcare products, and specialty industrial products. The company manufactures all of its products at its facility in Hauppauge, N.Y., and markets them through marketing partners, wholesalers, distributors, direct advertising, trade exhibitions, and mailings. The company offers an attractive and innovative personal care product line including lubricating gels and Lubrajel for water-based moisturizing. United-Guardian also sells two pharmaceutical products for urological use.
United-Guardian distributes and sells its pharmaceutical products only in the United States; however, its personal care products are marketed at a global level by marketing partners. The company sells approximately one-half of these products, either directly or through its marketing partners, to consumers located outside of the United States. As the consumer products industry has been facing fierce competition over the years, United-Guardian does have competition in the market for a number of its products. However, many of its products either have some unique characteristics or are unique in their field, and consequently are not in direct competition. United-Guardian is spending heavily on research and development. It is actively seeking to develop new products to expand its product line.
With this business model, the company has been garnering significant profits over the years. Its recent quarter profit presents an increase of 14% over the year-ago quarter with EPS of $0.28/share. It attained a record level of earnings despite no sales of Renacidin Irrigation, which is its largest pharmaceutical product. However, issues with this product have now been rectified, and the company has just received its first Renacidin shipment. With the recommencement of Renacidin sales, along with continued strong demand for personal care products, the company is on a winning streak and set to sustain its profitability momentum.
Strong profitability allows United-Guardian to generate significant cash flows. Its operating cash flows were at $3.9 million, and free cash flows at $2.3 million at the end of the recent quarter. The company returned around $2.1 million in dividends, which are completely protected by free cash flows. Its price-to-cash flow ratio of 15.5 also demonstrates similar trends. The company is looking to use its cash to make dividend payments and benefit from other growth opportunities. In the past five years, it has made large increases in its dividend. The below table demonstrates this trend.
How Tupperware Brands Corporation Is a Safe Investment
Tupperware Brands Corporation is a global direct selling consumer products company providing design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand, as well as beauty and personal care products. The company primarily distributes its products through independent sales organizations and individuals, which in many cases are also its customers. The vast majority of the company's products are, in turn, sold to end customers who are not members of its sales force. The company has strong local management teams in place, which implement its strategies to ensure its markets are on track.
Tupperware is seeking to expand and, therefore, working diligently on strategies to capture market share in emerging markets with its existing and new products. The company's businesses operating in emerging market economies achieved strong growth in the quarter, benefiting from a 13% sales increase in local currency. Emerging markets account for around 69% of sales. With over 85% of the world's population living in emerging markets, this continues to be a key advantage for the Tupperware business. Among the emerging market units, the main increases in sales were in Argentina, Brazil, China, Indonesia, Malaysia/Singapore, Turkey, and Venezuela.
On the other hand, established markets did not perform well for the company due to intense competition; they were down by 8% in local currency due to Beauty North America and Europe and higher interest expense. However, the company is looking to generate significant sales in these markets with a solid return on sales. On the whole, at the end of the recent quarter, its net income increased 17% over the year-ago quarter. Its success is driven by the power of its brand as well as its channel of distribution through a worldwide sales force of 2.8 million.
On the negative side, the company has been carrying a high debt-to-equity ratio of 2.27 when the industry average is only at 0.6. Still, its current ratio, which is standing at 1.26, is high enough to cover short-term liabilities. The company also issued $200 million of notes and its New Credit Agreement, increased revolving borrowing by $87.3 million for the funding of investment activities, dividends and ongoing share repurchases. Meanwhile, the company has been generating massive cash flows to support dividends and other growth opportunities.
The company has also been working hard to reduce its outstanding share count, which is further assisting in increasing its dividends. In the third quarter, the company returned $132 million to shareholders through a dividend payout of $32 million and the repurchase of 1.21 million shares for $100 million. Its payout ratio of 46% not only looks manageable, but also provides a lot of room to increase dividends.
The household and personal product industry drives demand by consumer preferences and population growth. The success of each company depends on effective sales and marketing, product innovation, and efficient operations. Mid-cap companies have some scale advantages in purchasing, manufacturing and distributing their products. These mid-cap companies can compete efficiently by offering specialized and innovative products along with capturing emerging markets. Both of these two companies have the potential to sustain their success, as both are showing strong growth in emerging markets combined with improvement in developed markets with both existing and new products.