Our answer is that there are two types of innovators, one of which is the perfect type of investment for capital growth and the other for income. We refer to these as 'disruptors' and 'leaders'. Disruptors are innovators with a big growth opportunity ahead of them through taking market share – think of Amazon and retail over the past two decades. Disruptors can be great businesses, but they are not income stocks because they are usually investing heavily in growth and so not paying a dividend.
Leaders, however, are the disruptors who have executed successfully over the long term and now represent the best in their field. They are highly profitable so they can pay a dividend. Moreover, their rare ability to continue to innovate and sustain their leadership position means that they will also protect that dividend and grow it.
Think of Estee Lauder, which needs little introduction as a long-standing global leader in cosmetics, with many of the best brands in the industry and the number one global market share in prestige cosmetics. Over the past decade or so it has embraced online and digital distribution strategies to keep its brands relevant to a new generation of consumers with very different shopping habits to previous generations. It has delivered 14 per cent average annual dividend growth and 275 per cent share price growth over the past 5 years.
How might Estee Lauder navigate stagflation? Well, through its reputation for the highest quality products and the building out of its own digital distribution it retains much stronger pricing power and control than if it had to rely on Amazon and other e-commerce platforms. So, it is a well-positioned income stock for stagflation.
Another example is United Health, the largest manager of healthcare benefits in the US, covering 50m members. One thing one can say about stagflation is that it is already here in the US healthcare system. US health care spending represents around 18 per cent of GDP. This is twice the OECD average and it has not bought the US better quality outcomes.
United Health is innovating to fight this stagflation using data to make the system more efficient and responsive to evidence on outcomes. It has delivered 20 per cent average annual dividend growth and 225 per cent share price growth over the past 5 years.
