Why I'm Backing Buffett And Beauty

Published in Investing on 14 May 2012

The beauty-product industry offers growth, resilience and dividends.

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, 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 to help face the pressures of the economy.

As for men, well, 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 global personal-care industry worldwide.

Big and beautiful

The personal-care sector is worth almost £200 billion 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, make-up, 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 are likely to need another jar and buy more. In my view, such repeat demand ought to create a more dependable business -- and share price!

Anyway, this 'dependability' is perhaps one reason why Warren Buffett's Berkshire Hathaway (NYSE: BRK-B.US) has become involved in the bid for Avon Cosmetics (NYSE: AVP) by Coty. The Sage of Omaha is helping to finance a takeover of Avon (market cap $9 billion) and, going 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 (NYSE: KO.US). No doubt Buffett's purchase of Tesco (LSE: TSCO) -- described in full in this free report -- "The One UK Share Warren Buffett Loves" -- was based on the same lines.

Shareholders of Reckitt Benckiser (LSE: RB) 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 not skin deep

So, with interest from Messrs 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, Frances' L-Oreal, America's Procter & Gamble, Japan's Shiseido and the UK'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:

CompanyDividend yield %Personal care/beauty product lines
Johnson & Johnson (NYSE: JNJ.US)3.8Propriety product lines
Procter & Gamble (NYSE: PG.US)3.5Cover Girl, D&G Cosmetics, Olay, Gillette, Braun, Max Factor,
Unilever (LSE: ULVR)3.6Lynx, Dove, Impulse, Lux, Ponds, Simple, Sunsilk, Sure,VO5, Vaseline
L'Oreal2.2Garnier, Body Shop, Maybelline New York, Lancôme, Kiehls,
Avon4.3Propriety product lines, plus Christian Lacroix
Shiseido3.7Aupres, NARS Cosmetics , Clé de Peau, Revital,
PZ Cussons (LSE: PZC)2.0Original 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 for my bathroom cabinet! You see, I am just as likely to have Dove's Deeply Nourishing Body Wash alongside Johnson & Johnson's 24-Hour Moisture Body Lotion, and Shiseido's Bio Performance Super Lifting Formula alongside that (Super Lifting Formula is for my face in case you're wondering!).

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 Of 2012" -- while it's still free!

Further investment opportunities:

Sonia does not own any share mentioned in this article. The Motley Fool owns shares in PZ Cussons and has recommended shares in Unilever.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Rustynail1966 14 May 2012 , 12:01pm

Great article. I have often wondered how one would buy into the boom in cosmetic surgery and botox etc as this will be a growing sector for exactly the same reasons.

sopavest 14 May 2012 , 2:03pm

It's worth noting that one of the particular attractions of Avon is its access to various emerging markets, especially Brazil, where its direct (doorstep) selling approach accounts for 30% of cosmetics sales. Brazil is the third-largest cosmetics market in the world...

It's unusual for Buffett to directly back an almost-hostile takeover attempt in this way and suggests he is keen on Avon as a long-term income generator.

Roland

Arborbridge 14 May 2012 , 2:48pm

I am a little confused here. Avon is written about as being the subject of a takover by Coty, so doesn't that make it a bit late to think of buying Avon shares now?

Arb.

WarrenLeBuff 14 May 2012 , 3:05pm

It is definitely worth following Warren Buffet in his Investment decisions.
I am not sure whether timing is right though as I would wait until the summer where I think we will see a bigger slump in shar eprices across the board with the typical Summer slide (sell in May adage) and with European fears.
On my blog, I did post some great Warren Buffet Quotes, if you are interested, as follows:
http://moneyography.com/warren-buffet-top-ten-quotes-of-all-time-2
regards
Mike

Arborbridge 14 May 2012 , 3:17pm

Mike,
I'm not sure if some sort of pun is intended, but if you do homage to someone in an article, it's only good etiquette to spell their name correctly:)

Arb.

rigbyf 15 May 2012 , 11:18am

Is it cheaper to buy a basket of shares or an investment/unit trust. All my investments so far are unit trusts and I get the initial fee refunded. I am now interested in buying individual shares such as the ones suggested above for this years ISA.
Can someone suggest how I should divide my allowance up between shares to maximise costs etc.

Thank you.

donovan5 16 May 2012 , 12:34pm

You might struggle to get an answer on a article page rigbyf
might be better to ask on one of the boards,maybe the investment strategies or investment trusts/unit trustd boards.

link to 2nd one which has some good posters:
http://boards.fool.co.uk/investment-trusts-unit-trusts-50097.aspx?mid=12555005

RobinnBanks 17 May 2012 , 1:02am

As Aborbridge points out to Mike - Buffett has two tees, although he usually drinks coke!

wellington101 20 May 2012 , 11:27am

This deal was pulled in the week Coty removed the 15 billion offer for Avon.

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