Ask the Rational Investor: Beautify your portfolio with Estee Lauder
One of the best-performing Consumer Staples companies over the last decade* has been Estee Lauder (EL). Their stock has appreciated 1,060% compared to 478% for peer companies and 283% for the S&P 500. When a company outperforms the market and peers so dramatically it is time to look under the hood!
Approximately 44% of 2019′s sales are attributable to skincare, 39% makeup, 12% fragrance, 4% hair care, and 1% “other.” Within each of these product-categories are many brands that you will recognize ranging from premium class brands such as LA MER and Bobbi Brown to Progressive Premium brands such as Tom Ford Beauty and Le Labo. Their product portfolio also includes more traditional and progressive entry price points such as Tommy Hilfiger, MAC, and Origins.
Most of these brands are sold through traditional distribution, such as department stores, upscale perfumeries and pharmacies. But as of June 2019, Estee Lauder operated 1,500 freestanding stores that are operated under a single brand name, such as Jo Malone London, Aveda, or Origins. In Europe, the Middle East & Africa an additional 800 stores are operated by third-parties.
Similar to other Consumer Staple companies, Estee Lauder has two big advantages. The first, consumers continuously purchase their products. Over the last several years, the global prestige beauty market has grown approximately twice as quickly as the overall consumer staples category. A strong revenue growth rate is complemented by very attractive margins.
The largest part of Estee Lauder, Skin Care, also has enjoys the largest operating margins of over approximately 30%! Comparing favorably to Make-up, Fragrance, and Hair Care at high single digits.
Great profitability and durable sales growth results in highly predictable cash generation. Management teams can allocate cash flow in five ways: reinvest in the business, pay a growing dividend, repurchase shares, pay down debt, and acquisitions.
As conservative investors, we tend to prefer that management teams pay a growing dividend and opportunistically repurchase shares at attractive valuations. Estee Lauder’s dividend per share in 2008 was $0.28 and has steadily increased to $1.57 in 2019. Goldman Sachs projects the dividend to continue to grow to $2.92 by 2023.
Every investment has merits and risks, and, as a result, it is best to discuss new investments with your investment manager who understands your goals and risk tolerance.
Sources: *Estee Lauder presentation; decade defined as June 2009 to May 2019, Goldman Sachs
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.