Why I'm Backing Buffett and Beauty
LONDON -- If there's one thing I've observed over the years, it's that even when money is tight, most women will never give up on their lotions and cosmetics to help them look and feel their best. Only last week, British retail chain Boots revealed it had 10,000 people on a waiting list for a modestly priced new "miracle serum" that claims to remove fine lines and wrinkles -- and we're supposed to be in a recession!
In fact, according to a 2010 trends report by L'Oreal, women will not compromise on appearance, and they continue to use cosmetics to cheer themselves up and help face the pressures of the economy.
As for men, there has been an explosion of male grooming products in recent years, and this sub-sector -- particularly sales of men's skin-care products -- is becoming a significant driving force within the growth of the global personal-care industry.
Big and beautiful
The personal-care sector is worth almost 200 billion pounds a year, and if that isn't impressive enough, the industry has been growing at a steady pace of almost 5% annually over recent years.
As you can imagine, the industry is as diverse as it is wide. It includes baby care, men's grooming, fragrances, makeup, deodorants, and bath and shower products.
For investors, what's interesting about the sector is that it deals in consumables. In other words, once you've used a jar of fancy eye cream, you will need to buy more. In my view, such repeat demand ought to create a more dependable business -- and share price.
This dependability is perhaps one reason why Warren Buffett's Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) has become involved in the bid for Avon Cosmetics (NYS: AVP) by Coty. The Oracle of Omaha is helping to finance a takeover of Avon (market cap $9 billion), and based on his prior investments, I doubt he'd put up the money if the target company did not enjoy a fair level of steady, repeat business.
In fact, Buffett's common stock portfolio is stuffed with companies that enjoy consistent, regular sales on a day-to-day basis -- you need look no further than the billionaire's largest holding: Coca-Cola. No doubt Buffett's purchase of Tesco -- described in full in the free report "The One UK Share Warren Buffett Loves" -- was based on the same lines.
Shareholders of Reckitt Benckiser (ISE: RB.L) may also be interested in Buffett's deal, as it involves former Reckitt boss Bart Becht. The much-admired Becht, who generated 500%-plus returns for Reckitt investors between 2000 and 2010, is chairman of the privately owned Coty and has launched the audacious bid for the door-to-door cosmetics group.
Beauty is more than skin-deep
So with interest from Messieurs Buffett and Becht in the personal-care sector, perhaps the likes of you and I should take a closer look as well. The industry is dominated by global players that include Germany's Beiersdorf, France's L'Oreal, America's Procter & Gamble, Japan's Shiseido, and the U.K.'s Unilever.
Assessing these multinationals is not easy, as many are not pure-play personal-care companies and include other lines, such as household care and pharmaceuticals. The table below shows some of the major players, which all boast leading brands and a loyal consumer following:
Dividend Yield %
Personal-Care and Beauty-Product Lines
Johnson & Johnson (NYS: JNJ)
Proprietary product lines
Procter & Gamble
Cover Girl, D&G Cosmetics, Olay, Gillette, Braun, Max Factor
Lynx, Dove, Impulse, Lux, Ponds, Simple, Sunsilk, Sure,VO5, Vaseline
Garnier, Body Shop, Maybelline New York, Lancome, Kiehls
Proprietary product lines, Christian Lacroix
Aupres, NARS Cosmetics , Cle de Peau, Revital
Original Source, Imperial Leather, Carex, Luksja, The Sanctuary, Charles Worthington, St Tropez, Fudge
From my novice investor's perspective, I personally would not spend too much time worrying about pinpointing the big winner among these names. For me, it makes perfect sense to buy a basket of all these companies -- in much the same way as I'd buy the contents of my bathroom cabinet. You see, I am just as likely to have Dove's Deeply Nourishing Body Wash as I am to have Johnson & Johnson's 24-Hour Moisture Body Lotion, with Shiseido's Bio Performance Super Lifting Formula (which is for my face, to be clear!) alongside that.
A basket of all these companies looks set to generate a dividend yield of approximately 3.6% -- in line with the wider FTSE -- yet these firms operate in a growing industry, and repeat sales are almost guaranteed. Having a spread of names should also reduce my risk, just in case one of the businesses gets into trouble.
Let me finish by saying that I am no Warren Buffett -- and I certainly don't have the cash to finance a buyout of Avon -- but I can certainly see the attractions of this sector, and that respectable dividend income looks good enough for me.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors for2012" -- while it's still free!
Further investment opportunities:
At the time this article was published Sonia does not own any share mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway and Johnson & Johnson.Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Berkshire Hathaway. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.