Why big brands can equal big returns

2 mins. to read
Why big brands can equal big returns

Developing a successful brand, or indeed a range of successful brands, is a key corporate goal for many businesses. Not only can a good quality brand deliver high margins and consistent cashflow, it can also help a company to create a valuable “economic moat”. This refers to the ability of a business to maintain a competitive advantage over time, protect long-term profits and stop rivals from taking market share. As long as the moat doesn’t eventually dry up, companies that have pricing power through their brand names can prove to be good quality investments for the long term.

The ultimate sign of a successful brand is when consumers are willing to pay a premium price for a product over an otherwise identical alternative. Take paracetamol for example. A generic pack of 16 supermarket own brand tablets, presented in uninspiring packaging, can be picked up for as low as 19 pence. But, despite containing pretty much exactly the same ingredients, a colourful packet of well marketed Panadol pills can cost up to £2, around 10 times more than the generic version.

Because of this powerful effect it’s no wonder that investors, both amateur and professional, are attracted to companies with a variety of strong branded products.

Warren Buffett is famously a fan of buying and holding stakes in companies with a range of well known brands. Discussing the concept of the economic moat, in his 2007 letter to Berkshire Hathaway shareholders he commented, “…a formidable barrier such as a company being the low cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.”

In the UK too, a number of popular fund managers have a penchant for brand based investing. Nick Train’s Lindsell Train UK Equity fund (which has risen by 273% since launch in July 2006) is well-known for investing in consumer brands, some of its top holdings being drinks giant Diageo, conglomerate Unilever and Dutch brewer Heineken. Terry Smith’s Fundsmith Equity Fund (up 240% since launch in November 2010) has a US bias with holdings including the likes of Microsoft, Paypal and tobacco company Philip Morris.

But there’s no need to focus solely on blue-chip stocks when looking to implement a brand-based investment strategy. Here follows three small/mid cap companies which I believe have strong brands and currently provide good long-term opportunities for investors….

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