The Difference Between Owning Brands And Being Owned By Them

by: California Dividend Bull

It is widely accepted among investors that corporations with strong brand names are good for pretty much every portfolio. These brands usually come along with a wide economic moat against their competitors and bigger profit margins for the brand owner. Strong brand products usually also charge a higher price because the consumer's affiliation toward the product is not so much driven by his/her intent to buy cheap but rather to use a superior product, to own status symbols or other reasons. Additionally, manufacturers of brand products spend a lot more money on advertising which also helps to convince many customers that they have to buy this certain product or brand.

Now, how does this equation look like on the consumer side? Being raised by frugal (but not cheap) parents definitely left its traces in my attitude towards brand names. As a side note I have to admit that in the country I was born in, western products were basically non-existent until around my 15th birthday. I've recently been thinking about the huge difference between what we use or where we go on an everyday basis and what I buy for our portfolios. Here's some examples:


What/Where we usually buy/shop

What we (would) invest in


Dr. K, a Kroger (NYSE:KR) store brand

Coca Cola (NYSE:KO), Pepsi (NYSE:PEP)


Norms, Sizzler (both private California chains)

McDonald's (NYSE:MCD), Yum brands (NYSE:YUM)


LA's totally awesome (sold in diverse Dollar store chains)

Procter & Gamble (NYSE:PG), Clorox (NYSE:CLX)


Food 4 Less

Wal-Mart (NYSE:WMT), Target (NYSE:TGT)


United Oil (a private Southern California chain)

Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM)


Capital One 360 (NYSE:COF), former ING direct

Wells Fargo (NYSE:WFC)

I could continue this list a lot further but I think you're getting my point. There are just two notable exceptions in our household: Charmin toilet paper and Skechers (NYSE:SKX) shoes. The former because I insist it's the best human invention since sliced bread and the latter because we happen to have an outlet store in our area where I can get a pair for $30 which usually retails for $150-200 just because there's a dent in the box or so. A funny bonus fact: both Charmin and sliced bread were invented in 1928 so they can be considered equally important to human society.

I always wonder why drivers pump gas for $4.05 a gallon when across the street the identical product is being sold for $3.95. This just eludes me. Although I'm unable to understand why so many people grab the more expensive stuff on the eye-level shelf instead of the discounted no-name product just one or two feet below, I do cherish this behavior for my investing success. There's no doubt that the fantastic annual free cash flow figures of companies like Exxon Mobil ($21.9 B, 2012 according to Morningstar), Coca Cola ($7.9 B), McDonald's ($3.9 B) or Wal-Mart ($12.7 B) are appealing to so many investors. Same goes for other financial metrics which usually show the picture of a great firm.

Annualized growth rates for the last ten years of selected companies (financial data from Morningstar, dividend data from CCC list):


Revenue Growth

Net income Growth

EPS Growth

Dividend Growth

Coca Cola










Procter & Gamble










Exxon Mobil





Wells Fargo





Let's stick with the example of the gasoline price. Saving 10¢ a gallon just for using the station across the street doesn't sound much. Now consider that your car needs ten gallons of gas a week. That's one dollar each week and around 50 bucks a year. These $50 invested in a tax deferred account for 20 years with an initial yield of 3.5% and a conservative 10% dividend growth will be worth $2,188 after 20 years. When you put the same 50 bucks into this account every year for the next 20 years, your portfolio will have a $2,908 value from the dividends alone, not even considering the capital appreciation of the holding.

How about another example? Let's say a Pantene Pro-V shampoo from P&G costs $7.49 in the supermarket. You get a shampoo for 99¢ at the dollar store. One could argue that a Pantene and a no-name shampoo are not the same product but I'm assuming that both products get the job done, i.e. clean your hair from sweat and debris. So using one of these bottles a month leaves you with a surplus of $6.50 which you can invest. After 20 years of compounding with the same assumptions as the other example and reinvesting the same $78 each year leaves you with a holding of $4,536.

In case you've come across John Rothchild's book "The Davis dynasty" about the great investor family of Shelby Cullom Davis and his sons and grandsons, you've heard of this anecdote:

Davis' grandson Chris asked his billionaire grandfather for a dollar because we wanted a hot dog. Instead of the buck the little Davis got a lesson on finance. One dollar invested wisely, doubling every five years and compounded for 50 years will be worth $1,024. So the question was not to have $1 for a hot dog today but having the snack cost you $1,000 over 50 years. The same wisdom is spoken out several times in the Stanley/Danko bestseller "The millionaire next door".

So what is the difference between owning the brand names and being owned by them? You can stick to buying the (more expensive) brand names, own your status symbols or believe that these products are so much better to justify their incredible markups.

By simply choosing to consistently pump gas at the cheaper station and using the no-name shampoo for two decades increases one's net worth by $7,444. Now think about the weekly shopping cart. Ours is worth $400-500 a month give or take. If we'd insist to fill it with fancy brand name stuff or just pushing it through a more fancy environment like a Target store instead of the rather ugly Kroger outlet, this could easily be in the $600-800 ballpark. That's a $300 difference! Then the gas and other stuff on top of that and we're probably speaking about $500 per month we can invest for delayed gratification instead of spending it right away. After just 20 years this translates to about $350,000. And this is quite a difference if you ask me...

Disclosure: I am long PEP, MCD, CLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.