In the era of changing consumer preferences, it’s important for companies to invest heavily in their brands. Cutting costs and becoming more efficient can only go so far. We saw this as Kraft Heinz lost over 27% of its value in one day. I’ve defended my purchase of companies like General Mills because of their strategy of building value for customers. KHC, on the other hand, has reduced advertising over the last four years and failed to make meaningful acquisitions. The company ultimately failed to adapt to a changing market. In doing so, KHC was forced to write down the value of their brands by $15.4 billion.
General Mills is a very similar company to that of Kraft Heinz. They both operate in the consumer-packaged goods sector and have a large portfolio of quality legacy brands. However, as the economy recovered from 2008, consumers had more discretionary income to spend on upstart brands. Furthermore, as healthcare costs rose, individuals became more health conscious. In the case of General Mills, consumers favored Greek yogurt over traditional Yoplait. They began buying organic snack bars instead of cereal. This trend eventually eroded the company’s earnings in recent years.
The difference between GIS and KHC, again, is the strategy. GIS acquired Blue Buffalo organic pet foods, and high-end natural brands like Annie’s. The company created Oui, a French yogurt to reclaim market share in the dairy isle. They invested heavily in creating tasty snack bars and made many of their cereals gluten free. From what I can tell thus far, KHC focused solely on cost cutting. This bolstered earnings in the short run and allowed the company to pay a hefty dividend. As time progressed, the root problem grew much worse, and the company’s brands lost significant amounts of value. In the coming years, KHC will need to perform a serious course correction or risk becoming another GE.
This travesty illustrates how dividend investors aren’t immune to the dangers of poor management. Sometimes we lose. A great product will only sell itself for so long. To succeed, a company needs to differentiate itself and create value. And of course, a juicy dividend doesn’t necessarily mean a company is healthy. For me personally, I’m keeping a sharp eye on companies like AT&T and Philip Morris. Both companies have decent fundamentals (for now) and strong dividends. However, there are signs of trouble. With that in mind its important to know the past is not indicative of future performance. Great investments can go bad and it’s important to get out before it’s too late.
DISCLAIMER: I am long on GIS, T, and PM. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.