Investing in companies that make consumer based products represent an optimal strategy due to five qualities:
1. Produce needed products integral to modern clean living
2. Immune to obsolescence unlike technology companies
3. Generate repeat business which means consumers use the products up in short order and need to buy more repeatedly.
4. If needed, minor price adjustments can make up for volume losses
5. Simple to understand and interpret
These types of businesses suffer a little less from economic cyclicality than the rest of the publicly traded universe, meaning that they can earn superior returns for their shareholders. This represents a good thing if you really want to generate wealth. Moreover, these companies rank high on the understandability factor crucial in the investment research process. You don’t need a Ph.D. in Electrical Engineering to understand them.
In the modern world, it’s customary to stay clean, and whether you wash cloths once a day, once a week, or even once a month eventually you will run out of laundry detergent. With that said, you may buy Arm & Hammer laundry detergent from “consumer packaged goods” company Church & Dwight Co., Inc. (NYSE:CHD).
Church & Dwight Co., Inc. (NYSE:CHD) operates in three simple product categories: personal care, household, and specialty products. The personal care category involves deodorant, tooth paste, vitamins, and hair removal. The household category includes its famous baking soda, pet care, household cleaner, and laundry detergents. Church & Dwight Co., Inc. (NYSE:CHD)’s specialty division caters mostly to the industrial markets in areas such as animal nutrition and cleaning. Moreover, the company divides itself along simple geographical lines: consumer domestic, consumer international, and specialty products.
Church & Dwight Co., Inc. (NYSE:CHD) possesses excellent fundamentals. In 2012 its revenue and free cash flow increased 6% and 24% respectively. Church & Dwight Co., Inc. (NYSE:CHD) did take on some debt last year but it still only comes to 32% of stockholder’s equity, below my personal threshold of 50%. Return on equity came in at a respectable 17%. A return on equity greater than 12% is considered good as a rule of thumb.
Last year, Church & Dwight Co., Inc. (NYSE:CHD) prudently paid out 30% of its free cash flow in dividends. Currently, Church & Dwight pays $1.12 per year in dividends and yields 1.8% as of this writing.
Church & Dwight owns a strong little portfolio of eight “power brand” products making it easier for management to handle. Product innovation and geographical expansion should result in shareholder rewards.