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McDonalds, Church & Dwight -- >>> Don’t Make

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gfp927z   Tuesday, 05/14/13 10:24:02 AM
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McDonalds, Church & Dwight -- >>> Don’t Make Investing Too Complicated

By Matthew Luke

May 10, 2013



If I could send a message back in time to my younger self, I would only need to use four words, “Keep it simple, Stupid!” This is great advice for life in general, but especially good advice when investing one’s own money. How much better would my stock portfolio would look today if I had realized this when I first began investing!

Sometimes we as investors can fall into the trap of associating complexity with a good investment. The more complicated an investment however, the more things can go wrong. Often it is simplicity that can be most consistently associated with good long-term investing. If I could have taught my younger self this lesson, I may have looked for investments that resembled these four:

Simple Liquor

Before October 2011, the simple company now known as Beam (NYSE: BEAM) was part of the overly-complex golf equipment, home products, security products and liquor conglomerate, Fortune Brands. Fortune Brands was a company with such a diversity of product-types that it actually hurt the company as a possible investment. Current and potential investors were unable to properly value a company that sold everything from golf shoes and sink faucets to pad locks and bottles of bourbon. Fortune Brands was a great example of needless complexity getting in the way of investors making a lot of money.

Since selling and spinning-off its various unrelated divisions, the renamed Beam has become a much simpler company and a much better investment opportunity. Previously a very bourbon-centric company, Beam has made many small accretive acquisitions in the past few years to give it greater exposure to the fast-growing liquor categories such as flavored vodka and Irish whiskey, as well its Skinnygirl brand, which has become one of the fastest-growing liquor brands in the United States. Times have been so good for Beam lately that they are currently facing supply problems with their Maker’s Mark brand due to a surge in overseas demand. While supply problems are never good, being supply constrained because your product is so incredibly popular is high-quality problem to have. If only more complicated companies saw the benefits that simplicity brings to a business.

Simple Consumer Goods

Consumer goods have always been a pillar of safe long-term investing. Toothpaste, deodorant, soap, laundry detergent; these are the types of relatively simple products that are some of life’s necessities, bought in good economic conditions and bad. And Church & Dwight (NYSE: CHD) has been one of the consumer goods industry’s best preforms over the past 10 years.

The management team has done an excellent job over the past decade of transforming Church & Dwight from a mostly single-brand company (Arm & Hammer) into a company with 7 ‘Power Brands’ that now occupy the No. 1 position in their respective product categories (and an 8th Power Brand that is also doing very well for itself). Current and a century of past management teams also have an impressive record of returning money to shareholders. This month, company management declared their 449th regular quarterly dividend, or just over 112 years of uninterrupted dividend payments.

Simple Healthcare

Abbott Laboratories (NYSE: ABT) is another good example of a company that simplified its complicated investment thesis by breaking itself up into two separate companies. In January, Abbott Laboratories completed the separation of AbbVie (NYSE: ABBV), which comprises Abbott’s old drug discovery pharmaceuticals division. Abbott Laboratories itself was left with the company’s medical device, diagnostics and nutritionals divisions.

Although the newly-separated AbbVie’s share price has outperformed Abbott Laboratories thus far post-split, Abbott Laboratories’ business should be the more consistent and faster-growing of the two going forward. Trying to discover the next multi-billion dollar blockbuster drug is a tall order for any pharmaceuticals company. And AbbVie currently has very little in the development pipeline to fuel future growth (as well as the patent expiration of Humira coming in 2016). For Abbott Laboratories though, long-term growth prospects are clearly visible with its exposure to emerging market countries such as China and India. This is particularly true for Abbott’s nutritionals division, which now makes up about 30% of Abbott’s sales and includes high-growth emerging market product categories such as baby formula.

Simple Fast Food

McDonald’s (NYSE: MCD) is a much simpler company than some give it credit for. Although many consider McDonald’s to be a global restaurant operator, an argument can be made that McDonald’s is actually a fairly simple real estate operator.

When we think of McDonald’s, we probably think of the almost 70 million customers served every day, the 119 countries of operations, the nearly 2 million worldwide employees that need to be managed or all of the food that needs to be sourced for each of its 33,000 worldwide restaurant locations. All of that all sounds like a rather complicated business undertaking. That is until you consider that approximately 82% of those 33,000 locations are operated by franchisees. The serving, operating, managing and sourcing are actually being done by the franchisees of McDonald’s.

Under the franchise model, McDonald’s Corporation functions much like a landlord; signing tenants (franchisees) to 20-year lease (franchise) agreements. Each month McDonald’s collects monthly rent payments from their franchisees for the use of the lands and buildings that McDonald’s owns. McDonald’s also collects royalty fees and advertising fees from its franchises (12% and 4% of restaurant sales respectively). While the sales of each individual McDonald’s restaurant can vary from time to time, McDonald’s is able to predictably expect the exact same fixed-amount of rent payments 12 times a year, every year, for the next 20-years. And at the end of the 20-year agreement, McDonald’s is able to renegotiate the contract again for even higher rent payments, starting the whole process over again.

Lessons of Foolish Youth
If there is one thing I wish I had learned earlier in my youth, it is that investing need not be the complicated endeavor some make it out to be. While there is certainly money to be made investing in complicated companies with complex business models, there is also money to be made investing in simple companies with simple business models. A very good lesson to learn, even if it took a little while to learn it.


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