Feeding Your Portfolio Baby Formula

With baby DivHut turning one recently you could say that the month of March centered mostly around him as well as my personal one year anniversary of being a father. After one year of changing diapers, feedings and formula, among other things, I began to think about his portfolio as well as other baby-centric dividend stocks. After all, we’re all here to read about our own personal dividend exploits as well as share some potential dividend investing ideas. While feeding him one late night I thought about the various companies that produce baby formula and wondered if some could potentially belong in his own portfolio. With that being said, let’s take a look at some of the major baby formula producers that pay dividends.

 

First up, is dividend stalwart Abbott Laboratories (ABT). A name that really needs no introduction to most dividend investors but has been a steady supplier of Similac formula for my baby for the past year. Currently yielding a decent 2.59% with a moderate payout ratio of 48.4% this company has been raising dividends for over four decades putting it in elite status among most dividend paying companies. Based on current cash flow the dividend appears to be very safe with room for future growth. The ten year annualized dividend growth rate for ABT is a decent 6.31%. From a simple PE perspective, ABT has a multiple of 23.2 with its five year average PE sitting at just 21.1. Forward PE looks more enticing at just 16.5. ABT is another four star rated stock from Morningstar.

 

Next on our formula producing quest is Mead Johnson Nutrition Company (MJN). A company with a history that goes back well over 100 years, like ABT, this maker of infant formulas and children’s nutrition products is best known for its Enfamil line. With a current yield of 1.99% with a moderate payout ratio of 47.3%, MJN like ABT, sports a safe dividend based on current cash flow with room for future growth. Speaking of dividend growth, MJN has been increasing its dividend for six years with an impressive five year annualized dividend growth rate of 12.90%. From a basic valuation perspective MJN sports a current PE of 25.6 which is slightly lower than its five year average of 27.2. Forward PE looks slightly better at 21.6.

 

Another name producing baby formula among many other products is Perrigo Company Public Limited Company (PRGO). Founded in 1887 and headquartered in Dublin, Ireland, PRGO produces all the store brand pharmaceutical, nutritional and other healthcare products carrying the brand of the specific retailer selling the product. Whether it’s a WalMart, Walgreens, Kroger, or some other store, PRGO manufactures the store brand alternative to the national brands. With that being said, PRGO has a complete line of infant formulas that compare to the national brands mentioned above and is carried in 40,000 store locations. The stock offers a tiny current yield of just 0.44% and a trailing twelve month payout ratio of 47.5%. While offering a stingy current yield, PRGO has a pretty impressive ten year annualized dividend growth rate of 11.86%. Looking at its PE the stock sports a multiple of 131.8 well above its five year average of 56.3. Forward PE comes back down to earth at 12.4.

 

Finally, we have a giant in the baby formula/food space with a product that is equally as known. That company, Nestlé S.A. (NSRGY) and the baby product, Gerber. Both well known names and brands that essentially cover the globe with its products. NSRGY gives investors a decent yield of 3.10% with a trailing twelve month payout ratio of 47.4%. The ten year annualized dividend growth rate of NSRGY is an impressive 13.21%. The current PE of 16.1 is well below its five year average PE of 19.3.

 

Of course, the companies profiled offer many diverse products besides baby formula and are well globalized. Are any of these famous baby formula producers in your portfolio? What have you been feeding your offspring? Similac? Enfamil? Store brand? Gerber? Please let me know below.

 

Disclosure: Long ABT

25 thoughts on “Feeding Your Portfolio Baby Formula

  1. Hey DH,

    We don’t have a baby yet (working on it, doing IVF this year) but formula is definitely something we will need to look at.

    In Australia, baby formula has had a huge, huge boom. Asians, particularly Chinese, love the Aussie brand and hate their own domestic products. Not only are our baby formula companies selling in China, but also Chinese people in Australia are/were buying huge quantities of it in Australia for $25 a tin and selling it to Chinese people in China for $100+ a tin. Supermarkets and pharmacies now have a max of 4 tins per customer. So what’s this done for the companies?

    Bellamys (ASX:BAL) listed August 2014 at $1.41. Price is now $10.43, up 739% (was $14.52)
    A2Milk (ASX:A2M) listed April 2015 at $0.56. Price is now $1.67, up 298%
    Bega Cheese (ASX:BGA) who supply the dairy for Bellamys (and the new Blackmores baby formula product) listed in August 2011 for $1.84. Price is now $6.08, up 330%.

    As you can see, they’ve done very, very well for themselves. Won’t grow anywhere near as much now, they are on very high valuations, but still, if you’d owned nothing but them, you would have beaten most investors.

    Tristan
    Dividendsdownunder recently posted…Shareholding Review: Greencross (ASX:GXL)My Profile

    • Hi Dividendsdownunder,

      Wow!!! What a story about Aussie baby formula. Living in the U.S. who would have known there was such a huge Chinese demand for the product. I would imagine there is a huge black market for the item as those markups the Chinese are willing to pay are pretty insane. Also, it’s pretty incredible the effect all this is having on your supermarkets and pharmacies. Thank you for bringing this to my attention.

      Good luck with the IVF. I hope everything works out for you both.

      • Hey DH,

        Thanks for your well wishes, we’ll post any updates on our blog 🙂

        There are some great investment stories of Australia (and New Zealand) companies really tapping into the Asian demand. The Asian middle class is becoming richer, wants Western brands, Western food, they want to travel and see other countries after having worked hard for a decade or 3. Australia is known for its wildlife, beaches etc but Asians are seeing its companies, its products, its destinations as places to visit. Sydney Airport (ASX:SYD) releases monthly passenger figures, and the Asians are coming in bigger and bigger numbers (every update seems to have a double digit increase from the last time from China, India, Japan, Malaysia etc). They are staying at hotels, going to casinos, going to theme parks (all of those are investable in some company or another on the ASX).

        Anyway, a bit off topic. The baby formula thing has gone crazy because a few years ago (somewhere 2008-2011) a popular Chinese formula was found to be using dangerous / bad ingredients and it put Chinese people off their domestic products for the foreseeable future. There is somewhat of a black market, the Australian formula company Bellamys for example produces tins written in English, sold in Australia, they also produce tins written in Chinese, sold in China. Fake companies make these tins that look like the real Chinese product, so people mistrust those. That’s why the Australian market is in such short supply, because it’s the English tins that seem the genuine article and why a $25 tin is being sold on Ebay-equivalents for $100+. The sellers even include a picture of the receipt to show the date and time where the tin was bought, as extra proof it’s the real deal. This has created massive demand for Bellamys and others, hence the huge rise in revenue, profit and share price.

        Tristan
        Dividendsdownunder recently posted…Shareholding Review: Greencross (ASX:GXL)My Profile

        • Hi Dividendsdownunder,

          You paint a very incredible picture of the Chinese demand for Aussie products. Living in the U.S. I feel very detached from goings on down under. The truth is that all what you say is news to me which is kind of cool how the Internet made the world that much smaller. While I have done quite a bit of travel I still have not made it to Australia or New Zealand but I know I will eventually. Seems like every Chinese product is inferior whether it’s a cheap rip off, dangerous or simply low quality. No wonder there is such high demand for western products. I appreciate your insight.

  2. Purchased ABT last week @ $39. Long history of dividend payments and it has dropped nicely to start a position.

    I could have sworn that I read an article about MJN cutting/freezing their dividend. I maybe mistaken.

    • Hi SamtheMan,

      Congrats on the ABT buy. It’s been in my portfolio for many years with no plans to sell it for the foreseeable future. It’s one of the rare dividend stalwarts out there that has been rewarding shareholders for decades and decades. I would love to know/see where you read about the MJN dividend. I could not find anything that suggested a freeze or cut but would be happy to amend the post if I find out something new. I appreciate your comment.

    • Hi Dividendniche,

      Like you, I like NSRGY a lot for all the reasons you mention. One thing I do not like, is the annual dividend distribution. I would much rather get paid four times a year than once. Still, it’s an amazing company with a tremendous global reach and dozens of highly recognizable products. It doesn’t get more solid or blue chip than this consumer staple. Thank you for stopping by and commenting.

    • Hi FV,

      I never really considered any of these names except for ABT and each company mentioned has its own stable of solid recognizable brands and moat. MJN is probably most similar to ABT with a strong consumer offering. Thank you for commenting.

    • Hi TCF,

      NSRGY is found in a few of our fellow dividend blogs but not as popular as you might think. Personally, I wouldn’t mind it in my own portfolio but do not care for the annual distribution. I much prefer getting paid four times a year than once. Thank you for your comment.

  3. Divhut,

    The wife and I have yet to pump out any spawn but I did just feed my portfolio the “formula” I think it needed. I grabbed some ARII (which you already saw and commented on) so that my portfolio could have a “train set” or I guess in ARII’s case, a repairer/producer of train sets :). Out of what you looked at here though, I’d say I like Nestle the most. They boast a great history and I’ve got friends in their company that have nothing but good things to say about how it’s managed from the inside. Not trying my hand at insider trading but I do like to know how employees feel straight from their mouths if possible rather than simply trusting their direction of company owned stock.

    -Dividend Reaper

    (I do not currently own any Nestle but I would like to)
    Dividend Reaper recently posted…The Importance of WatchingMy Profile

    • Hi DR,

      Whether it’s baby formula or a train set, the bottom line when selecting a dividend growth stock is making sure you have found a sustainable dividend with room for future growth. Thanks for sharing your insight about work life at NSRGY. It’s always nice getting a perspective from people on the inside. Thank you for stopping by and commenting.

  4. Sector recommendation is back!! Love reading these for inspiration! Every year, in my small little department would have 3-6 people expecting baby. It’s a nice business to be in – diapers and such.

    The stock market was in the 15,xxx earlier this year, now it’s 17600, I’m holding my cash for now as more volatile is ahead. I pretty spent my saving during the 15xxx bout, now, I got to rack up my saving, I want to have $50K before retirement next year. Unless the stock market drop again, I’ll keep my cash for rainy days. I might invest the dividend payout as they trickling. 🙂

    • Hi vivivanne,

      You know I love those sector specific dividend posts. It’s a fun and easy way to find potential dividend stocks that you may not have considered. I did another one not that long ago. Maybe you missed it, Medical Devices Make For A Healthy Portfolio.

      The market has really come on strong since the February lows. It’s amazing how negative all the talking heads and financial headlines were the first six weeks of the new year. All of a sudden things are roses again. That’s why we must ignore all the financial noise out there and just continually invest as planned. I can understand your wanting to sit on some cash these days. It’s always nice to have when the market goes south. As always, I appreciate your comment.

    • Hi Andre,

      Glad you find value in these updates. I plan to continue looking at various dividend paying stocks from sector specific viewpoints. I find it useful in uncovering some dividend paying names you might not ever consider nor ones that come up when running various screens. Thank you for sharing your thoughts.

  5. Divhut,

    Thanks for the great article! I love this theme and the several article mini-series. What’s cool about these products is that every person with a child uses these products….and there are a heck of a lot of children out there.

    One company I am very interested in on this list is Nestle. They pay an annual dividend and their ex-date is coming up around the corner on April 8th. So I guess I have to make a decision soon, right? I love the company thought and would be willing to live with an annual dividend.

    Keep the great article series coming. Baby Divhut’s going to have the highest net worth in pre-school history at this rate!

    Bert
    Dividend Diplomats recently posted…Why I Haven’t Purchased a Stock in 30 DaysMy Profile

    • Hi DD,

      Any parent will always spend on their child. The fact is that baby/children related sectors tend to be quite resilient during bad economic times. Much like the the consumer staples, a parent will not stop buying food, diapers or clothes for their baby because “times are tough.” Like you, I’m a fan of Nestle but do not like an annual dividend payment. If they ever switched to a quarterly or even twice a year payout I’d strongly consider them. No doubt, NSRGY possesses a lot of the stable and resilient qualities we look for in long term dividend paying companies. Thank you for stopping by and commenting.

  6. I agree, in Australia, baby formula has had a huge, huge boom. Asians, particularly Chinese, love the Aussie brand and hate their own domestic products. Not only are our baby formula companies selling in China, but also Chinese people in Australia are/were buying huge quantities of it in Australia for $25 a tin and selling it to Chinese people in China for $100+ a tin. Supermarkets and pharmacies now have a max of 4 tins per customer.

    • Hi BBW,

      This was all news to me courtesy of Tristan who lives in Australia. These excessive prices that the Chinese are willing to pay really surprised me and just goes to show what brand power can do for a product. Here in the U.S. many baby formulas are kept in a locked display because they have a tendency to go missing from open shelves. I guess any product can find its way into a black market. Thank you for sharing your thoughts.

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