Do not write off the global consumer – Evenlode’s Yarrow

Consumer branded goods companies have significant sales exposure to emerging markets and prices were hit by the recent China-driven stock market volatility.

However, recent results in the sector were a reminder that despite tough conditions globally, these businesses enjoy a resilient demand profile (shampoo, soap, toothpaste, beer, cigarettes etc.), pricing power and good levels of cash generation.

Unilever, for example, managed to post underlying sales growth of +6% in emerging markets for the first half of the year, during a period in which GDP for emerging markets in aggregate (excluding China) appear to have not grown at all.

Several of our positions in this sector also have very good potential for margin progression in our view, thanks partly to falling commodity prices and also to efficiency improvements.

It is true currency weakness has been a significant drag on reported earnings for these businesses over the last two years, and has slowed the rate of dividend growth in the sector overall.

However, currency headwinds will ultimately ease and turn to tailwinds, and in the meantime dividends continue to move forward at a reasonable rate.

Below are the prospective dividend yields and the most recent dividend increases from our largest positions in this sector.

Longer term, the opportunity for these companies to grow cash flows and dividends thanks to their geographically spread brand portfolios remains compelling in our view.

More generally, we view global diversification as a positive attribute, notwithstanding the market’s recent preference for companies with cyclical gearing into the UK economy.

Geographical expansion presents opportunities for incremental growth and returns over the long-run.