Paul Newman: An Entrepreneurial Iconoclast

Paul Newman was a WWII veteran. Paul Newman was a movie star. Paul Newman was race car driver. And oh yeah, Paul Newman was also a successful entrepreneurial iconoclast. Yes, you read that right.

In 1982 Paul Newman and his good friend, A.E. Hotchner, started the Newman’s Own food product line from scratch and turned it into a consistently profitable niche food company.

The Rational Dividend = A Variable Dividend

Employing a variable dividend policy encourages an ‘ownership mentality’ in the shareholder base, reflects a management approach that is forethoughtful and affords financial versatility from cyclical downturns/economic shocks.

Progressive Corporation and Cal-Maine Foods use what I believe is one of the smartest business policies for dividend-paying public companies, the variable dividend. The concept is as simple as it sounds. It is predicated on a willingness to return a portion of earnings directly back to shareholders on a consistent but not necessarily uninterrupted basis. Here is a quick summary of how each policy fits the unique needs of each business.

Laboratory Corporation of America – case study #4

Business Description: Laboratory Corporation of America (LH) is the 2^nd largest independent clinical lab company in the USA. The Company provides routine and specialized clinical testing services to hospitals, managed care organizations (MCOs) and physicians. This is a nice detailed account of their history.

Competitive Advantages:

I. High barriers to entry. The diagnostic lab testing business is a high fixed cost operation that requires a large volume of work to attain the operating leverage necessary for profitability; as a result smaller labs typically earn lower margins and are vulnerable to acquisition while potential competitive start-ups are unlikely to emerge owing to the almost guaranteed initial sub-profitable periods necessary before attaining a meaningful amount of scale. The past 15 years in the industry have seen a high amount of consolidation driven by LH & Quest Diagnostics (DGX), and a low amount of new entrants who can achieve scale.

McCormick & Co. – case study #3

Business description: McCormick & Company, Inc. (MKC) was founded in 1889 and today is a global leader in the manufacturing, marketing and distribution of flavor products, including spices, herbs, extracts, seasonings and flavorings, and other specialty food products to the entire food industry. Its major sales, distribution and production facilities are located in North America and Europe and operate in two business segments: consumer and industrial. The consumer segment sells spices, herbs, extracts, seasoning blends, sauces, marinades and specialty foods to the consumer food market under a variety of brands worldwide; it is the primary driver of their business representing approximately 58% of sales, 80% of FY08 EBIT profits. The industrial segment sells seasoning blends, natural spices and herbs, wet flavors, coating systems and compound flavors to food manufacturers and the food service industry, both directly and indirectly through distributors and represents 42% of sales and 20% of FY08 EBIT profits.

Reckitt Benckiser Plc – case study #2

Business description: Reckitt Benckiser Plc (RB) is one of the world’s largest household products companies. Reckitt Benckiser owns a range of popular household brands and was formed in December 1999 from the merger of Reckitt & Colman plc and Benckiser N.V. The Company’s product portfolio is centered around 5 areas: fabric care, surface care, dishwashing, home care and health & personal care. In 2008 they recorded annual sales of £6.6 billion; their products are sold in more than 170 countries. For a detailed account of Reckitt Benckiser and its history check out this link.

Thesis: Since the formation of Reckitt Benckiser in 1999 it has been transformed from a good company to a world-class company in the household products space. It owns a collection of 17 exceptionally strong brands and can boast of enviable gross & operating margins that meet or exceed many competitors. The following are the key reasons it is a high-quality business:

Nestle – case study #1

This case study focuses exclusively on Nestle’s Food & Beverage businesses/segments and ignores any analysis of their Pharmaceuticals segments (e.g., results relating to investments in L’Oreal and Alcon)

Business description: Nestle Group is the largest food & beverage business in the world. It is a leading nutrition, health & wellness company and has a history that dates all the way back to 1867. With a manufacturing facility or office in nearly every country of the world, their global scale is large. Nestlé markets approximately 7,500 brands organized into the following categories: baby foods, breakfast cereals, chocolate and confectionery, beverages, bottled water, dairy products, ice cream, prepared foods, foodservice, and pet care; I define this as Core F&B. For a more detailed description of Nestle and its history check out this write-up.

Thesis: Nestle’s wide product portfolio, strong brands, nearly universal consumer goodwill and global scale set it apart the competition and give it a sustainable competitive advantage that should endure in the decades ahead.