- Why demographics matter.
- How demographics support growth for the food industry.
- Why I like McCormick.
At some point in my investing life I realized that the baby boomers were going to dominate the economy for decades to come. It probably happened for me as I first saw the portrayal of the baby boomer generation using a boa constrictor with a big lump going through it, supposedly the "pig." We baby boomers were the pig and the snake was the economy. It became obvious that figuring out what our generation would consume was a key in finding the investing sweet spot at any given time.
Since my interest had been peaked regarding consumer trends and habits I decided to take a look at what information was available from the Bureau of Labor Statistics Consumer Expenditure Survey. It is amazing! Now we have another significant generation coming up to replace the boomers, called the Echo Boomer generation. The significance of this next big generation will not be a driving force in the economy immediately, but it gives me hope for future growth in industries that could otherwise remain in decline.
I will get into more detail on why this information tells me that the future remains bright for McCormick (NYSE:MKC) well into the future in a moment. Briefly, there are three trends that support this logic: baby boomers eating out more, rising incomes in emerging markets, and global population growth. But, first I would like to provide a little more background about why demographics should matter to investors.
Most economists assume that the primary drivers of consumption of durable goods and discretionary goods are monetary and fiscal policies. I cannot agree completely. Those factors can influence the degree to which consumption trends take root in an economy and help to promote higher sales of certain items at different times, but only temporarily. But the reality is that as people go through life many of us are more likely to purchase certain items in greater quantity (or at all) at different stages (ages) of life.
Obviously, most married couples buy more diapers during their mid-twenties to late thirties, when the majority of women are most likely to start a family and bear children. Then the kids grow out of diapers and pull ups and into underwear. Demand for diapers drops. As families begin to grow they often want a bigger house and a minivan. When the kids graduate from high school, most of them leave the home and either get jobs or go to college which changes the spending habits of the parents.
By the time people turn 50 years of age or so most are empty nesters as the kids are grown and on their own (or in college). This is a major lifestyle changing point for most people. At this point in life folks tend to eat meals away from home more because of the convenience and (without those teenagers) it costs less. And as someone who likes to cook I can testify that it just isn't as much fun to cook for two as it is to cook for four or more. But instead of trying to identify which restaurant chain will be the biggest winner, I like investing in the indirect beneficiary that will do better during this trend no matter where people eat; whether it is fast food, casual dining, fine dining or at home.
I also like taking advantage of two other major demographic trends that we are experiencing now; world population growth and rising incomes in emerging markets. Rising incomes in emerging economics such as China, India, Russia and Brazil means that a large portion of the global population is moving from subsistence into the consuming class. That portends additional benefits for the global food industry.
Growth in the projected world population rising from the current level of 7.2 billion to 9.6 billion by 2050 could also provide steady growth for food producers and processors. Many of those new global inhabitants will be born in under-developed nations. The good news is that as leaders of those countries observe the improvements occurring in the emerging nations more will make the necessary changes to bring greater economic growth and prosperity to their own fast-growing populations. Some will not change but we cannot predict how many or which ones will or will not. It is only important to understand that some will and each one that does will create additional growth opportunities for those companies that are in the business of feeding people.
There is one company that delivers on all three counts: McCormick . This is one of my all-time, all-weather favorites. MKC is a major producer and distributor of spices, seasonings, flavorings and other specialty food products for consumers, food processors, and the food service industry. So, no matter where we eat MKC is likely to provide part of most meals we eat. The company faces favorable trends both domestically and abroad with foreign operations providing over 40 percent of sales. I expect that percentage to continue to grow for many years.
As people in emerging markets move out of poverty and subsistence into the consumer class by virtue of rising incomes, more are choosing the consistency of quality they perceive from McCormick. It is a trend that should power both top and bottom line growth for decades.
Something else I like about MKC is the resiliency of the stock price. During the last two recessions MKC stock fell much less than the broad S&P 500 index (33% vs 57% in Great Recession). EPS never even dipped; a good reason for the strength of the stock price. Quality management, good acquisitions, a market that continues to grow, a strong balance sheet and a long history of returning value to shareholders through rising dividends translates into an investment that can be held forever. For more detail about why I like MKC please consider my earlier article on the company.
Since this stock suffered far less than the S&P 500 in 2008-09 and the company continues to expand in emerging markets, I would expect any future response to recession to also be muted. The recent price (as of the market close on Friday, March 14, 2014) is $67.65 while the 52-week high attained on May 26, 2013 is $75.26. I like MKC primarily because of the consistent growth in earnings per share and the potential growth over the next several decades. The current price represents a ten percent discount from the 52-week high. That is already a relatively big "dip" for this exceptional dividend grower.
Over the coming months and years I will try to sort through the possibilities to bring you more investment ideas that fit into my own portfolio and, hopefully into yours as well. I will not only be looking at the influence of the baby boomers, but also the echo boomer generation who will replace us. I will also do my best to integrate potential demand, where applicable, from the rest of the world. Global demographic trends and income growth are also important trends that I will include in my analysis where appropriate.
As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other's experience and knowledge.