Earnings yield high at consumer giants as resilience marks them apart
Published 29/07/2010 | 05:00
This is the last article covering the US global consumer franchise stocks, and this week we take a look at the average value on offer in a basket of these stocks, compared to what is available in non-risk assets, like government bonds.
An earnings yield describes the amount of earnings you are buying, compared to the price you are paying, and is more easily compared to a rental yield on property, or the yield on government bonds.
As the chart highlights, the US 10-year government bond currently yields 3pc. In comparison, the earnings yield available from a collection of six US global consumer franchise companies is closer to 6.7pc. The collection of companies includes Coca Cola, Johnson & Johnson, Wal-Mart, Proctor & Gamble, Kraft and McDonald's.
The earnings yield was higher in early-to-mid 2009 when markets were lower and reeling from the global banking crisis. Other than that, however, the earnings yield available from this basket of blue chips has rarely been higher. Back in early 1990, the earnings yield was an attractive 6pc. But at that same time the US government 10-year bond was offering a yield of 8pc, and was competing hard for investor's money at that time. Today, however, the US government bond yields a paltry 3pc.
The resilience of earnings in these franchise stocks and their ability to grow those earnings over time marks them apart. The repetitive nature of the demand for Coca Cola's products in difficult, as well as buoyant, economic conditions, its bullet-proof brand and global distribution power provide its earnings with this resilience. Likewise, McDonald's low price points, speed of service and consistency of product globally have allowed it to consistently dominate the fast food industry and to deliver reliable growth over time. Proctor & Gamble has a collection of multibillion dollar brands in household and personal care products where, again, demand is steady in good times and bad.
If earnings from the US global consumer franchise stocks are as reliable as the income from a government bond, and they have been in the past, then, surely, the value now lies with these stocks, and not with the bonds.
Throw in emerging market and mixed currency exposure and the value proposition is even more promising.
Most likely, investors' fears of a double-dip recession have driven them to bonds. But the value is clearly in the US global consumer franchise stocks -- double-dip economic recession or not.
This series was written by Rory Gillen, founder of www.investRCentre.com. A copy of all five articles in the series will be available, in PDF format, by emailing to info@investRcentre.com