The Prudent Investor


Narrowing The Consumer Goods Sector
March 20, 2007, 7:40 am
Filed under: Consumer Goods

Last post I noted the industries in the Consumer Goods sector that would be considered. Looking into the future is something that nobody can do, so I will be looking at current numbers in the hopes that they will help determine the most profitable path.

There are two numbers that very nicely separate this grouping into IN and OUT baskets. Return on Equity (ROE) is an indicator of profitability. Obviously, we want to invest in an area of profitability, and dividing the Net Income over the past twelve months by the shareholder’s equity (resulting in a percentage) is one means of measuring this. Eight of the fourteen industries have double-digit ROE values.

Net Profit Margin is another indicator of success. This value is obtained by dividing the income by the revenue (again, resulting in a percentage), and basically represents the percentage of revenue resulting from the income. Companies that can do more with what they’ve got than others get a nod.

Looking at the numbers for each of these industries I see a clear dividing line right down the center – seven companies have a value of 6 and above, while the other seven have a value less than 2.5. All seven of the former have double digit ROE, so we have whittled the industries down to:

  • Cleaning Products
  • Appliances
  • Processed & Packaged Goods
  • Dairy Products
  • Beverages – Soft Drinks
  • Business Equipment
  • Food – Major Diversified

I am seeking an established company, and while growth is always advantageous, I have harped about debt long and hard in the past. As I have not changed my mind that an established company should not be wallowed in debt, I am going to remove Dairy Products and Business Equipment, as their Debt/Equity ratios are both above 1.

Finally, I do like the comfort of a dividend. In a case where a company’s price does nothing, at least the investor receives dividends as payment for holding the stock. Three industries average Dividend Yields over 2% and two average under 2%, so removing the latter removes Cleaning Products and Appliances.

This leaves me with three industries:

  • Processed & Packaged Goods
  • Beverages – Soft Drinks
  • Food – Major Diversified

In my next post I will make a decision as to which industry to select so that I can begin looking at companies.

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