Food Stocks For The Long Run

By Sham Gad | June 26, 2012 AAA

The reason to invest in food companies is the most obvious: every day, billions of people eat two to three times a day. When you have demand like that it's easy to understand the long-term appeal of investing in food related companies. But there's more to the story.

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Peeling Back the Onion
Aside from the fundamental demand of eating, there's another subtle reason that food businesses can be great long-term investments. There is no technology or obsolescence risk with food. A food company doesn't have to worry about the same risks that Blackberry's maker Research in Motion (Nasdaq:RIMM) deals with. Food won't fall victim to the same risks that electronics retailer Best Buy (NYSE:BBY) is facing - people won't walk into a grocery store, find the food item they want and then leave to buy it cheaper online. For these reasons and others, Kraft Food (NYSE:KFT) can consistently pay investors a 3% dividend each year. That dividend won't go away and will likely continue to increase as Kraft's bottom line continues its stable advance.

A Variety of Food
In addition to food suppliers like Kraft, restaurants can also be attractive food-related investments. Americans enjoy dining out - even when the economy is weak. Dining out can be a simple and affordable way to have a night out. Restaurants also support travelers and working people who have to eat. It's not surprising that over the past few years, while the economy was contracting, value concepts like McDonald's (NYSE:MCD) performed very well. But even going forward, McDonald's has set the stage for future growth: a growing menu with new fresh items like Angus burgers, smoothies and desserts. Shares have fallen around 10% over the past few months and yield a quality 3.2%.

One of the fastest growing trends in food is a focus on healthier eating. The two standouts, Panera Bread (Nasdaq:PNRA) and Chipotle (NYSE:CMG) have seen their share prices soar to the point where the valuation is bit scary despite enormous success going forward for the two companies. Food service giant Sysco (NYSE:SYY) is a great back door for investors to benefit from the stable demand for food products to restaurants. Sysco's shares trade for about 15 times earnings topped off by a near 4% dividend yield.

The Bottom Line
Food certainly is not an exciting business, but excitement invites competition and competition can disrupt profits. Indeed, there are many players in the food industry, but the best concepts have a history of consistent cash flow generation, and in many cases a stable growing dividend, two perquisites for long-term value creation.

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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