Inghams Group Ltd (ASX: ING) is Australia's blue chip poultry producer, as well as one of my favourite consumer staples companies on the ASX 200.
There are 5 reasons I believe Inghams is a good long-term investment.
Chicken meat is growing in popularity
Chicken meat is consumed more than any other meat in Australia, with the average Australian consuming it 2.2 times per week, which exceeds the consumption of beef and pork combined. According to the Australian Chicken Meat Federation, over the last 20 years, the annual per capita consumption of chicken has surged by nearly 80%, from 28 kg per person in 1997 to nearly 50 kg per person in 2017, while the consumption of other popular meats has generally declined per capita.
The Australian Bureau of Agricultural and Resource Economics expects this trend to continue going forward, with chicken consumption per capita expected to rise 5% by 2023, while beef and veal consumption is expected to drop 8% and sheep consumption is forecast to drop a further 6%.
The growth in chicken consumption is due to multiple factors:
- Chicken is increasingly seen as a healthy food choice, being relatively high in protein and low in fat
- Chicken is much cheaper than other meats in Australia. In 2017 the average retail price was $5.30/kg, while beef and veal was $19.30/kg, lamb was $14.80/kg and pork was $11.90/kg
- There have been significant increases in the efficiency of chicken meat production over time. As a result, the Australian retail price inflation of chicken meat has been very low compared to other meats. In the period from 1997 – 2017, the retail price of beef, veal and sheep rose between 3.4% – 4.2% per annum, while the retail price of chicken meat rose only 0.4% per annum
Poultry production is a defensive industry
Inghams could be considered a 'safe investment', as the demand for chicken meat would be unlikely to soften significantly in a declining economy. In fact, due to its cost advantages relative to other meats, the demand for chicken could actually increase during an economic slowdown. Therefore, holding all else constant, Inghams should be expected to generate reasonably consistent and stable earnings irrespective of how the economy performs.
Australian and New Zealand poultry production has high barriers to entry
Australia and New Zealand operate in strict quarantine regimes, which restrict the importation of chicken meat due to the risk of introducing harmful foreign pathogens into the Australian ecosystem. This virtually shuts out foreign competitors from the Australian market, with around 99% of the chicken consumed in Australia being produced here.
The capital requirements to establish vertically integrated chicken production facilities are also very high, not to mention the difficulty of getting regulatory approval to develop new farming facilities.
Inghams is an established and trusted brand
Inghams has been operating for 100 years and has developed a strong reputation for quality and reliability amongst its consumers, having a market share of 40% in Australia and 34% in New Zealand.
Inghams is also the largest vertically integrated poultry business in both Australia and New Zealand, with geographically dispersed operations across both countries, which gives the company access to economies of scale and flexibility, whilst managing agricultural and environmental risks. These factors give the business competitive advantages over its competitors.
Company fundamentals
Inghams has a track record of consistently generating solid earnings. The company reported revenues of $2,373 million and EBITDA (earnings before interest, tax, depreciation and amortisation) of $212 million in FY18.
The company is also expected to deliver fully franked dividends of 18 cents per share in 2019 according to Morningstar estimates, which would translate to a very attractive grossed-up dividend yield of 6.8% at Inghams' current share price of ~$3.80.
Foolish Takeaway
I believe Inghams is a great investment if you are looking to get exposure to the Australian consumer staples sector and desire stable earnings and a high dividend yield. I put Inghams up there with A2 Milk Company Ltd (ASX: A2M) and Costa Group Holdings Ltd (ASX: CGC), as the Australian consumer staples stocks I am most excited about in FY19.
