Kao (4452), which has 29 consecutive increases in dividends, is a stock recommended even for beginners. Target when it dips!

Kao Corp. (4452) is a company that has continued to pay increasing dividends for 29 consecutive years, the longest streak among Japanese listed companies. It leads clearly as number one, far ahead of the second SPK (7466) with 21 consecutive years.The longest consecutive dividend growth among Japanese listed companies. It is the number-one by a large margin.

Household goods market is an unwavering oligopoly

I believe continuous dividend growth is an ideal scenario for a listed company. To achieve it, earnings backing is necessary. Kao has steadily built its earnings, even if not strictly achieving continuous revenue and profit growth every year.

This performance is possible because it has built solid brands in everyday goods.The diaper brand "Merries",the laundry detergent "Attack",the shampoo "Biore"have been familiar to many people.

The power of consumer goods should not be underestimated. Even for laundry detergent, the products seen on shelves are Kao's "Attack," Lion's "Top," and P&G's "Ariel" almost exclusively.This field appears highly competitive, but is actually an oligopolistic marketin nature.

Warren Buffett also values consumer goods highly. Since these products are used daily and many people stick with the same brand, this creates an "economic moat." Subscriptions and trendy trends are far from this reality.

Going forward, Kao is likely to continue growing thanks to its domestic market share, expansion of product lines, and overseas growth in China and Asia, among other regions. At the very least, the current earnings are unlikely to deteriorate significantly.

Kao’s growth prospects are “market-average”

What investors should pay attention to ishow far earnings will grow. Kao has set long-term targets toward 2030. When comparing the 2018 target to the 2030 target, it looks as follows.

Sales: 1.5 trillion yen → 2.5 trillion yen
Operating margin: 13% → 17%

If this can be achieved,operating income would roughly double. However, it would take 11 years, sothe growth rate of operating income would be about 6.5% per year. This is almost at market average.

In other words, if the price-earnings ratio (PER) stays the same,buying the stock now and holding it would yield only market-average returns.

Currently, the PER is about 25x. Strong brands in consumer goods tend to stabilize around this level, so it is unlikely to fluctuate much. Therefore, it seems hard to expect large profits from this stock.

Why Buffett would buy it even without dramatic growth

So, why does Buffett favor buying such stocks?

In short,because the risk is low. The risk here includes both business risk and stock-price fluctuation risk.

Regarding business risk, as described above, it makes essential products that are consumed in any economic environment and maintains an oligopoly.

Stock-price fluctuation risk is mitigated because the PER stays around 20–25x, so even when shocks occur, price volatility tends to be milder than the overall market. In times of market anxiety, capital tends to flow into such stocks.

With the added factor of a consecutive dividend increase, the stock is unlikely to experience a large drop and can offer stable price appreciation.Beginners should start with such stocks, I believe.

If you want higher returns, “Buy the Dip”

However, investing in individual stocks only to see market-average growth is dull. If you want more,this is a good opportunity to learn timing to buy.

Even such a solid stock can fall due to overall market fluctuations or unexpected news. There have been times when it dropped to PER around 15x in the past.

Nowlet's suppose the PER has fallen to 15x. If earnings grow at 6.5% annually for the next ten years and the PER returns to 25x, the stock price would rise by about 3.1 times.Annual return of 12%. That would be quite a good level.

If you buy such a solid stock and achieve 12% annualized return,it is an efficient investment in terms of risk-reward. Do not judge solely by absolute returns.

In other words,to increase returns while keeping risk low, buy non-flawed stocks like Kao when their price falls. It is not difficult. Buffett built his wealth this way.

The strategy of buying when prices fall is calledBuy the Dip. Kao is a suitable stock for this. New investors should keep this in mind first.

Please also refer to the articles below.