The biggest risk in investing is that the business goes bankrupt. This is a 100% loss of your investment; the “worst case scenario.” Progress inevitably leads toward changes in the market. Old business models fail, and new models will succeed. The biggest disruptions of the past several decades have been the personal computer and internet revolution. We now live in a time where the cost of storing and transmitting information has dropped to virtually zero. It is interesting to see what businesses have not been disrupted from the rapid changes the world has seen over the last several decades.
People Still Need Food
No matter how much information we have, people will always need to eat. One way to look at if an industry has managed to grow over decades is to see how many Dividend Aristocrats the industry claims. Dividend Aristocrats are businesses that have increased their dividend payments for 25 or more consecutive years, and meet certain size and liquidity requirements. These are businesses that have withstood all of the changes of the last 25 or more years, and managed to grow consistently and profitably. There are 54 Dividend Aristocrats. The list below shows the Dividend Aristocrats whose primary business relates to food and/or beverages:
- McDonald’s (MCD, Financial)
- Coca-Cola (KO, Financial)
- PepsiCo (PEP, Financial)
- McCormick & Co. (MKC)
- Archer-Daniels-Midland (ADM, Financial)
- Hormel Foods (HRL, Financial)
- Brown-Forman (BF.B)
- Sysco (SYY, Financial)
Of the 54 Dividend Aristocrats, eight (~15%) make their money from food and/or beverages. Interestingly, six of the seven (ADM and SYY are the exception) make their money from branded consumer food and beverages. If you are looking for slow-changing businesses that grow year after year, branded food companies are a good place to search.
We Still Get Sick and Need Health Care
Health care will be necessary until we find a cure for everything. There is a less than infinitesimal chance of us finding a cure for everything in the next several decades. The following companies are Dividend Aristocrats whose revenue is generated primarily in the health care sector:
- HCP, Inc. (HCP)
- AbbVie (ABBV)
- Johnson & Johnson (JNJ, Financial)
- Abbott Laboratories (ABT, Financial)
- Walgreen (WAG)
- Medtronic (MDT, Financial)
- Becton Dickinson (BDX, Financial)
- Cardinal Health (CAH)
- C.R. Bard (BCR, Financial)
Not to be outdone by the food and beverage industry (or perhaps due to negative health effects from the food and beverage industry), the health care industry counts nine Dividend Aristocrats in its ranks. They operate in more diverse lines of business than the food companies. HCP is a REIT that focuses on health care properties. C.R. Bard, Medtronic, and Becton Dickinson manufacture and distribute health care devices and supplies. Abbott Laboratories and Johnson & Johnson (and to a lesser extent, Cardinal Health) are well-diversified health care businesses. AbbVie was recently spun-off from Abbott Laboratories (notice the vaguely similar names), and is a pharmaceutical company.
Despite the varied nature of these health care companies, they have all taken advantage of rising global spending on health care. As per capita GDP continues to rise (on average) throughout the world, people are demanding better health care. Additionally, an aging global population requires more health care than ever before. The nine companies above have ridden these trends and grown consistently for at least 25 years.
Insurance Hasn’t Changed Much
Big data and cheap information has not reduced the earnings power of insurance companies. Technology enhances insurance, as it allows actuaries to more precisely determine risks. The following companies are in the insurance industry and are Dividend Aristocrats:
The reason there are only three insurance companies that are Dividend Aristocrats is not because the insurance industry has gone through tremendous changes. Rather, the insurance industry is highly competitive. It takes an exceptionally well-run business to outmaneuver its competitors in the insurance industry. The three companies above have done just that for more than 25 years.
The Advantage of Slow Changing Industries
The advantage of investing in businesses from slow-changing industries is that you can sit back and watch your investment grow over time, instead of having to constantly check and make sure the business in which you have invested in has not faltered. Great businesses in slow-changing industries can compound wealth at above market rates for decades at a time. Great businesses in mediocre industries will eventually succumb to the competitive forces and poor economics of their respective fields. Poor businesses in great industries are pushed out of business by great businesses. Finally, poor businesses in poor industries make generally terrible long-term investments. Identifying which industries offer the best chance of long-term outperformance can increase your odds of generating above average stock returns.
