When stock markets fall, it’s time to get busy.
Many investors run a watch list of quality firms they’d like to buy, and there isn’t a better time to look at the thing than when share prices are weak.
But when my existing portfolio is being dragged down with the market I often don’t feel like putting more money into shares – that’s when I need to get over myself!
Buying shares after a stock market correction often works out well for investors over time. The trick is to drill down into a firm’s individual prospects. If nothing much has changed, it could pay me to hold my nerve in the teeth of a stock market gale, hold onto my shares and even to steel myself sufficiently to buy more.
Here are two compelling reasons to focus on hard drinks provider Diageo (LSE: DGE) and consumer goods firm Reckitt Benkiser Group (LSE: RB).
1) Brand-driven growth
The great strength of consumer goods firms is their consistent cash-generating abilities. Dependable flows of cash tend to enable the firms’ directors to keep pushing up the dividend.
We can see that effect playing out in Diageo’s financial record:
|
Year to June |
2011 |
2012 |
2013 |
2014 |
2015 |
|
Net cash from operations (£m) |
2183 |
2093 |
2033 |
1790 |
2551 |
|
Dividend per share |
40.4p |
43.5p |
47.4p |
51.7p |
56.4p |
There’s a similar story going on with Reckitt Benkiser:
|
Year to December |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Net cash from operations (£m) |
1,544 |
1,740 |
1,888 |
2,121 |
2099 |
|
Dividend per share |
115p |
125p |
134p |
137p |
139p |
Diageo’s success is powered by well-known super brands, such as Johnnie Walker, Crown Royal, Buchanan’s, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness.
As with all consumable products people tend to buy them, love them, use them and buy them again. However, with alcoholic beverages, there’s the added attraction of the products’ addictive qualities to help bolster the steady cash flow generated from sales.
Meanwhile, Reckitt Benkiser powers forward with brands such as Dettol, Harpic, Durex, Strepsils, Gaviscon, Vanish, Cillit Bang and Calgon. Such consumer favourites generate brand loyalty from customers and have strong repeat-purchase credentials.
The ‘secret’ of those ever-gushing cash flows is found in the strength of the consumable brands, which tend to keep Diageo and Reckitt Benkiser immune from the more severe effects of macro-economic cyclicality.
2) Diversified market coverage
Reckitt Benkiser’s consumer products span several market sectors, a situation which provides attractive diversification. Last year, 43% of core net revenue came from hygiene products, 32% from health products, 21% from home-related offerings and the rest from other markets.
Meanwhile, Diageo’s operations diversify across the spirits, beer, wine and ready-to-drink blends market sectors.
What now?
Stock market corrections and macro-economic wobbles shouldn’t blind us to the ongoing attractions of solid cash-generating businesses such as Diageo and Reckitt Benckiser.
General stock market weakness can serve up opportunity for investors to buy shares in such quality outfits at better prices.
