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Defensive Franchise example: Givaudan

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We took an introductory look last time at the characteristics Sarasin use to classify companies under consideration for investment. The first of these corporate categories was defensive franchises. Here we’re going to take a closer look at the specific example of Givaudan, a leading manufacturer of flavours and fragrances for a variety of consumer-oriented end markets.

Here’s the description we shared of typical defensive franchises:

  • Market leaders in their industries, with demonstrable barriers to entry.
  • Consistently earn high returns on invested capital with limited variability across the economic cycle.
  • Free cash flow generation is usually high and predictable.
  • Generally have pricing power and a sustainable competitive advantage.

Occupying approximately 25% of the global industry market share, Givaudan has developed a strong natural, bio-based and sustainable ingredient to offer its customers which should enable it to grow faster than its peers.

In terms of internal structure and strategy, the company’s remuneration policy is aligned with shareholder outcomes; the board of directors has a high representation of female members and a significant number of independent directors; and our investment partner Sarasin believe management are sensible allocators of capital.

Factors supporting the investment case for Givaudan include:

Long-term opportunity for growth. Expanding demand for flavours and fragrances is supported by thematic growth drivers such as increasing population, rising life expectancy and ongoing urbanisation.

Industry structure. The global ingredients industry is highly concentrated and oligopolistic – the top four players (Givaudan, Firmenich, IFF and Symrise) have an aggregated market share of more than 80%. As a defensive franchise stock, Givaudan will provide consistent dividends irrespective of market conditions.

Internal structure and results. Givaudan is a superbly managed business: margins and returns have risen as the company has cemented itself as a core partner for its customers; where it has merged with or acquired other businesses, they have added value and improved the company; and cash returns to shareholders are backed by a robust balance sheet and generous dividend policy.

Hopefully the example of Givaudan gives an insight into the particular factors at play in a defensive franchise, but these corporate characteristics are only one of the criteria Sarasin consider when approaching investment opportunities.

Givaudan also scores well across the board on ESG factors. The company is on track to reach a target of responsible sourcing of 90% of its natural raw material ingredients. It recognises local workers and communities as stakeholders and maps itself against the UN Sustainable Development Goals.

As experts in the responsible investment arena, Sarasin actively engage with the businesses within their portfolios through an ongoing screening process – their high thresholds must be consistently met.

Next time we’ll look at an example of a disruptive growth business: ASML Holdings NV.