Does Foreign Vs Domestic = Growth Vs Income?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kraft recently split itself into two companies. One, retaining the iconic Kraft (NASDAQ: KRFT) name, is focused primarily on the domestic U.S. market. The other, called Mondelez (NASDAQ: MDLZ), has a material bias toward foreign markets. Leading up to the split, the company pitched the corporate action as offering investors a choice between an income oriented stock and a growth oriented stock. This isn't the first company to make such a split and it won't be the last. However, the question investors have to ask is, "Am I really going to benefit from this move?" The answer isn't as clean as these companies would have you believe.
Another Big Split
Altria also made a similar move several years ago. After shedding its food (Kraft) and beer (Miller) businesses, the company took the additional step of spinning off is international tobacco operations as Philip Morris International (NYSE: PM). While it's not quite clear what Altria stands for anymore, it is obvious that the only business it has is domestic tobacco. Again, the pitch was that Altria would be an income vehicle and Philip Morris International would be a growth vehicle.
Companies Can Stay Together And Move Offshore
These two moves seem to suggest that in mature categories the growth versus income spectrum is also one of foreign versus domestic. This same dichotomy is obvious in other companies, too, where the focus seems to be on expanding in foreign markets. Take Yum! Brands (NYSE: YUM), for example, where the company is expanding aggressively in China, including the purchase of Chinese fast food concepts, and already earns a material amount of revenue from operations in emerging markets. The term "emerging markets" has almost become a buzz word for growth in corporate releases.
Mature Markets Tend Toward Slow Growth
As an investor, it's important to step back and take a second look at accepted wisdom. Select businesses in mature markets are indeed saturated and likely to grow only slowly, including fast food restaurants and packaged foods. The reasons for this situation are pretty simple. Generally stagnant to slightly declining populations coupled with a long period of general prosperity has allowed long lived companies to expand across mature markets like the United States. With already material industry positions, companies like pre-split Kraft were left to fight for market share in the United States. While industries like packaged foods grew overall, that growth has slowed to a crawl.
Emerging Markets Have The Wind At Their Backs
Emerging markets, on the other hand, tend to have still expanding populations and, perhaps more importantly, an expanding middle class. Both are huge tailwinds to growth, as more people means more sales opportunities and more wealth usually means more disposable income. These are the two reasons why so many companies are targeting emerging markets for growth.
Is This The Right Move?
So is this foreign growth versus domestic income split the right one? For aggressive investors the long-term logic of such a move seems pretty sound. So switching from Altria and Kraft to Philip Morris International and Mondelez may make sense. That said, there are some interesting issues to consider in many emerging markets. For example, countries like China are still largely reliant on exports to support their growth. This means that mature markets need to remain stable and growing for many emerging market economies to continue their climb toward a more mature state. The only other way for these nations to get there is to nurture their own internal demand so that it can pick up the slack if foreign demand falters.
With Europe on the verge of a continent wide recession and the United States in slow growth mode, at best, foreign demand may not be as stable as many emerging economies hope. This could pose a material risk to companies that have bet the house on these countries. While there is clearly the potential for material growth, there is also the risk of faltering demand. If that risk seems too great for you, then perhaps companies focused on mature markets would be the better option.
Mature markets, such as the United States, have their own problems, however. Slow growing populations, at best, and generally weak economies top the list. Still, for companies like the new Kraft and Altria, the top and bottom lines are fairly resilient and stable because of the businesses in which they operate. So, a bird in the hand may be worth two in the bush if you want to sleep well at night.
Companies like Yum!, meanwhile, can offer a compromise so long as they retain their exposure to mature markets and continue to expand into emerging markets. That said, Yum! is moving more aggressively into such countries than some other highly desirable companies like McDonald's (MCD). So, even in this, there are shades of gray to consider that can increase and decrease the risk profile of an investment.
Don't Count Vibrant Mature Markets Out
With all of this, however, one has to consider that many mature markets are still vibrant and changing, a fact that is particularly true of the U.S. market. So it is still possible to find growing companies without having to visit foreign shores, it just requires a little more research and a willingness to own smaller companies. So, maybe you can get your income and growth in the domestic market after all.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!