Ride the Spending Trends
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The average American household had an income of $63,385 and spent $49,705 in 2011. Where did all the money go?
The following chart shows the portion of total spending by major category as well as the trend observed since 2000 (not adjusted for inflation). The information was compiled by the U.S. Dept. of Labor.
(*) Since 2000 and not adjusted for inflation (source = US Dept of Labor)
Some key takeaways from the data:
1. Healthcare is not a significant portion of spending right now at 6.7% but is increasing at a brisk 4.4% annual rate. Personal insurance needs also have grown at a 4.4% annual rate (some of that increased spending is related to higher health insurance costs, so the two categories are somewhat interrelated).
2. Transportation is a major spending item but is rising at a relatively slower rate over the long-term as compared to most other categories. A primary driver in this category is the price of oil, which tends to be more volatile over the short term.
3. Housing is by far the number one spending category, and it is increasing at a moderate rate over the long term. This is in spite of the recent downturn in the real estate market.
If the trends continue the statistics provide the typical investor some guidance for the future.
One obvious takeaway is that healthcare and related industries provide opportunities going forward as households continue to ratchet up spending there.
One company to consider is Bio-Reference Laboratories (NASDAQ: BRLI). The New Jersey-based medical testing company operates in only a handful of states, so there is ample room for expansion. And with a low debt level, plenty of cash and a history of strong earnings growth (an average of 25% per year over the past five years), which is likely to continue, the company has a good story to tell.
The pharmaceutical and consumer healthcare products giant Johnson and Johnson (NYSE: JNJ) continues to rake in cash and pay out its dividend, which has been increased every year for the past 56 years. Currently sporting a nice 3.5%, yield the stock touched an all-time high in October.
A new drug developed by the company, Sirturo, which can treat patients with multiple drug resistant tuberculosis (MDR-TB), was just approved by U.S. regulators. Although it probably will not be a big money-maker, since only about 100 people get the disease every year in this country, it will generate good will and shows that Johnson and Johnson is continuing to innovate, a strong indicator of growth going forward for any business. Globally, most people who do get the disease wouldn't be able to afford the treatment.
Earlier this year the company acquired Synthes, a manufacturer of orthopedic surgical devices, which should also help contribute to future earnings growth in the long term, especially in emerging markets where Johnson and Johnson has been slow to invest in.
Home Depot (NYSE: HD), the do-it-yourself home improvement company, has taken advantage of the upturn in the real estate industry. Recent solid earnings and revenue growth has helped the stock significantly outperform the overall market over the past few years. It was one of the Dow's best performers in 2012. Growth is likely to continue as more and more people renovate existing dwellings and build new homes.
Another company that may be able to benefit as the result of an improving housing situation is Williams-Sonoma (NYSE: WSM), which supplies home furnishings and housewares. Earnings growth has picked up recently (to around 12% per year), overcoming some recent sluggishness, and that should continue as the company plans to expand into new markets. The stock appears to be priced reasonably with a P/E of about 18, well below its peers and its recent history, and it pays a $0.88 dividend to boot. Another big positive is a very low debt level.
It is important to see how the average American household spends its money. Companies that are positioned to take advantage of the trends might turn out to be a good investment.
Mathman6577 owns shares of Bio-Reference Laboratories and Johnson & Johnson. The Motley Fool owns shares of Bio-Reference Laboratories and Johnson & Johnson. Motley Fool newsletter services recommend The Home Depot, Johnson & Johnson, and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!