What's the value of a name? According to Interbrand's recent 'Best Global Brands of 2011' it's a whole heck of a lot. Coca-Cola (KO) has long been the world's most valuable brand and last year was no exception, with an Interbrand estimated value of over $71 billion. This represents nearly half of The Coca-Cola Company's $150 Billion market cap and from afar might seem like a bit too much fizz for a single beverage. Then again if you walk into your local Wal-Mart (WMT) and sit by the soda isle for an hour, the brand value will become immediately apparent.
Rival PepsiCo (PEP) has long disputed Coke's superior taste, and has repeatedly beat its opposition in the 'Pepsi Challenge' , yet as of late Pepsi has lost market share to both Coke and Diet Coke. Further, given a blind taste test between Coke, Pepsi and a generic brand one can be certain that the votes would not be cast in the same manner as the products are purchased. Luckily for Coca-Cola, and even PepsiCo for that matter, consumers are not blind to brands; instead they are immersed in them. This interaction is such that efficiency and innovation, for established businesses, have taken a back seat to the valuable brand.
Coca-Cola's brand has the ability to demand premium dollars above the generic, while reserving the ability to adjust prices accordingly. For an investor, this is precisely the type of business model one should be interested in. Here's a look at the top-10 brands by value according to Interbrand:
Top Ten Brands in 2011
As a dividend growth investor, I instantly noticed a preference for dividend growth companies and an overwhelming focus on payouts. Dividend growth companies included: Coca-Cola, IBM, McDonald's (MCD) and Intel (INTC); while Microsoft (MSFT), General Electric (GE), Disney (DIS) and Hewlett-Packard (HPQ) all have dividend histories. Notably, Google (GOOG) and Apple (OTC:APPL) don't pay dividends. However I would argue that these companies behave much in the same manner as the others on the list, but simply are young in there processes and still require an elevated level of capital reinvestment.
Just as Microsoft waited until 2003 to initiate a dividend, in time dividends will likely come with GOOG and AAPL too.
The idea that a valuable brand is also a well-paying dividend company shouldn't come as much of a surprise. After all a brand allows for a comparative advantage that enables higher margins and larger cash flows. Unless the company squanders its immense advantages, this will likely produce excess cash. Even if some advantages are lost, investors should do well with the long-term protection of the valuable brand asset. As Peter Lynch clarifies: "Go for a business that any idiot can run - because sooner or later, any idiot is probably going to run it."
Let's take a look at 8 dividend stocks amongst the world's top-10 most valuable brands.
Coca-Cola - A Warren Buffett favorite for over two decades now, KO has long been a knock out. With 49 consecutive years of increasing dividends, it's not really a matter of 'if' there will be another increase but more aptly 'when.' My bet would be the Third Thursday of February as has been the case for at least the last 14 years. The current yield is around 2.8%, while the upcoming payout pump could increase your yield on cost over 3%. As many dividend growth investors might expect, KO has been able to grow dividends by about 10% annually for the last decade. Past success is no indication of future wealth, but if the world's strongest brand remains intact, it seems investors will be rewarded with more of the same.
IBM - Buffett made waves last year with his purchase of IBM, suggesting that in his experience "no one ever got fired by going with IBM." But, this New York-based technology stalwart doesn't usually catch much acclaim in the dividend community with its 1.6% current yield. However, Big Blue has been able to increase payouts for the last 16 years with average dividend growth rates in the double digits. Current yield has remained low due to a huge price run-up, but early investors have certainly been rewarded with rising yields on cost. With a payout ratio near 25% and the second most valuable brand in the world, a 17th consecutive dividend increase looks more than reasonable this April.
Microsoft - Microsoft certainly doesn't have the dividend history of KO or even IBM, but a dividend has been paid since 2003. For some, the $0.80 annual payout and 2.8% current yield might be a touch low, but certainly not for Bill Gates and his near 521 million shares. This nets him a nice little $800 a minute before taxes. For the rest of us, the 5-year average dividend growth rate around 14.9% looks promising, as MSFT is only paying out around 30% of its profits. As the dividend history matures, investors may continue to demand cash in hand rather than buying say Skype-like businesses.
General Electric - GE had a strong history of increasing dividends… until 2009 happened. The $0.31 a quarter dividend was slashed to just a dime in the height of economic turmoil. Since then four increases have been made, but the quarterly payment has only now reached $0.17 a quarter; a far cry from the level enjoyed just four years ago. I suppose the 2008/2009 dividend stall did provide an opportunity to jump ship early, but dividend investor's criteria was surely affected. Moving forward the 3.6% current yield and near 50% payout ratio appear reasonable for the fifth most valuable brand on the planet.
McDonald's - McDonald's has been one of those companies that keeps dividend growth investors saying "Gee, I wish I could have gotten in." Today, the price to play is at an all time high at over $100 a share. In just the last five years, price has appreciated at an average rate of about 19% each annum; while the dividends have been increasing by over 13% a year. MCD currently yields 2.8% with a payout ratio near 55%. Further, McDonald's enjoys a history of increasing payouts for the last 35 years. Perhaps MCD isn't a bargain today, but definitely worthwhile for any dividend growth investor's wish list.
Intel - Buffett's IBM purchase might have rejuvenated technology targets for the dividend growth investor, as Intel has surged as of late. Those looking beyond what IBM can do for them, could do well taking a look at INTC. This California-based semiconductor company has increased dividends for eight consecutive years now, with the five-year average growth rate coming in at about 16%. INTC has a payout ratio near 35% and a current yield of 3.3%, both of which appear promising for those looking for a solid mix between yield and growth in the seventh most valuable brand.
Disney - Disney has long been known for its kid-friendly movies and theme parks, but don't forget DIS's media giants ABC and ESPN. At first glance the 1.5% current yield and near 25% payout ratio both appear to be a touch low, albeit slightly. However the dividend policy is especially irksome, with just a single annual payment in January. This means that if you bought a share today you would have to wait until January of 2013 for your next payment. True, payouts have been increasing by about 14% over the last five years, but I can't imagine income investors willing to buy today for a dividend next year. Perhaps a bump in the payout ratio or a more evenly dividend payment plan would attract new investors.
Hewlett-Packard - This California-based Technology Company isn't really known for its dividend history, but HPQ has been doling out payments since 1995. They were effectively frozen until a 50% quarterly bump to $0.12 in 2011.This means that Hewlett-Packard now has a current yield of about 1.8% with a payout ratio near 15%. Dividend increases are certainly doable, as a yield on cost over 6% could be achieved by paying out just 50% of profits. Perhaps it's too soon to tell, but future increases seem reasonable.
I agree that Google and Apple are very strong companies with the corresponding ability to demand market share. Analysts think so as well, as many come to a collective one-year target upside between 15%-20% for these two companies. However, I wanted to focus on viewing the value of a brand through the dividend growth investor's eyes. There is a strong link between the consistency of increasing payouts and the ability to rely on one's brand. If I were looking for a fundamental business with the wherewithal to create lasting shareholder value, the world's Top 100 Brands seems like a pretty reasonable place to start.