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Companies Pricing Power

Companies Have Pricing Power – Week in Review

Companies Have Pricing Power

Consumers continue to be exasperated by high inflation. The causes include high fiscal and monetary stimulus to combat the COVID-19 pandemic, record drought, the War in Ukraine, supply chain disruptions, and excessive pandemic lockdowns in China. The United States Federal Reserve is trying to lower inflation by removing stimulus and increasing borrowing costs. The result has been a bear market for stocks. Bonds have done even worse, as seen below. Both asset classes have performed poorly for the first time in many years. However, one little-discussed aspect of inflation is that companies have pricing power, whereas they did not for many years.

Companies Pricing Power
Companies Have Pricing Power

Stock Market Overview

Despite the positive weekly return, the stock market is still in a bear market, as illustrated by data from Stock Rover*. The Nasdaq and S&P 500 Index is in a bear market. The Dow Jones Industrial Average (DJIA) is in a market correction. The stock market will need several more positive weeks for a meaningful recovery. Although all sectors rebounded, Energy and Industrials had a significant uptick.

Stock Market Returns
Source: Stock Rover*

Asset class returns demonstrate how poorly bonds have performed. Even assets to protect against inflation have struggled. For example, TIPS and Gold are in a market correction. However, they are performing relatively well compared to other asset classes. The only asset class that has seemingly benefited are US Government-issued Series I Savings Bonds, whose interest rates are nearly 10%.

Asset Class Returns
Source: Stock Rover*

Why Do Companies Have Pricing Power?

One little-known fact is company profit margins are rising. They declined from about 2014 until the pandemic. Since then, they have surged. This fact means companies have pricing power. For example, energy companies have higher profit margins because of higher oil and fuel prices. But other companies are increasing prices, too, especially in the packaged food industry, contributing to inflation. For example, breakfast cereal prices are rising at the fastest pace in years. According to Earnest Research, prices increased in March 2022 by 16% for General Mills and Pepsico and 12% for Kellogg’s. Moreover, these increases have not caused a decline in market share.

Company Profit Margins
Source: Yardeni Research

Industry Consolidation

One main reason is market segments, and entire industries have consolidated to the point only a handful of primary players exist. This phenomenon has happened across multiple packaged food industries. For example, in the case of breakfast cereal, the top four companies by brand market share are General Mills (~43%), Kellogg (~27%), Quaker Oats of Pepsico (~15%), and Post (~10%). The point is that combined; they control roughly 95% of the market. Moreover, this oligopoly means that these companies have pricing power.

Consolidation is not limited to breakfast cereals. The meat industry has consolidated too. The top five chicken companies are Tyson Foods, Pilgrim’s Pride, owned by Brazilian company JBS SA, Sanderson Farms, Perdue Foods, and Koch Foods. As recently as 2018, they controlled around 61% of the market, which is probably higher in 2022 because of additional acquisitions by Tyson. But, again, this concentration means the companies have pricing power.

Similarly, the four largest beef producers in the United States are Tyson Foods, Cargill, JBS SA, and National Beef, owned by Brazilian company Marfig. Reportedly, they control ~80% of the supply to the wholesale market. Again, this consolidation suggests the companies have pricing power.

Examining profit margins, they have trended up in the past decade. For example, Tyson Foods’ profit margins have more than tripled in the past decade, suggesting industry consolidation has increased pricing power and the ability to lower costs.

Portfolio Insight - TSN (Net Income Margin)
Source: Portfolio Insight*

New Entrants Lack Distribution and Sales Volumes

Moreover, new entrants have a significant barrier to entry. Since their product sales volumes are low, they will have difficulty gaining shelf space or distribution. 

In addition, smaller companies that cannot gain scale or efficiencies will be acquired. For instance, in early 2022, Post acquired Treehouse Foods reducing the number of competitors. Hence, it is unlikely consumers will see price relief in breakfast cereals.

Breakfast Cereal Market Share
Source: Ernest Research

In another example, the non-alcoholic beverage industry, Coca-Cola, Pepsico, and Keurig Dr. Pepper, control the three nationwide distribution networks. In fact, most new entrants must partner with these companies to achieve national distribution. Many are acquired, furthering consolidation.

Final Thoughts on Companies Have Pricing Power

Industry and market segment consolidation are not limited to the ones discussed above. Other industries are consolidated, giving companies pricing power, including candy and chocolate, paper products, office supplies, eyeglasses, internet search, airlines, railroads, travel search, rental cars, mattresses, food services, retail pharmacies, home improvement stores, etc. The bottom line is companies are consolidating, increasing pricing power and profitability. The result is less choice for consumers, but on the other hand, investors are receiving greater dividend streams and share buybacks.



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Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of September 2022. As a result, the number of companies on the list has risen to 573. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in August.

The new additions were Invesco Mortgage Capital (IVR), Steelcase (SCS), Sturm, Ruger & Company (RGR), and TPG (TPG).

Market Indices

10/22/22

Dow Jones Industrial Averages (DJIA): 31,083 (+4.89%)

NASDAQ: 10,860 (+5.22%)

S&P 500: 3,753 (+4.75%)

Market Valuation

The S&P 500 Index is trading at a price-to-earnings ratio of 19.52X, and the Schiller P/E Ratio is about 27.66X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. However, we are nearing the long-term averages. Earnings multiples of more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down about 2.5 points at 29.69. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

CBOE VIX
Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the New York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The US Census Bureau reported housing starts dropped 8.1% to a seasonally adjusted annual rate of 1.439M units in September. August data was revised to 1.566M units from the previously reported 1.575M units. Year-over-year housing starts are down 7.7%. New residential building permits, a proxy for future construction, rose 1.4% to a seasonally adjusted rate of 1.542M units. Only the Northeast (-9.4%) experienced a decline in new residential permitting. The Midwest (+4.0%), South (+3.1%), and West (+0.3%) all saw increases. At 1.427M, housing completions were 6.1% above August’s revised 1.345M units.

The Labor Department reported a decrease in initial jobless claims for the week ending October 15th. The seasonally adjusted initial claims reported at 214,000, a decrease of 12,000 from the previous week’s revised level. The previous week’s level was revised down by 2,000 to 228,000. The four-week moving average, which smooths out volatility was 212,250, an increase of 1,250 from the previous week’s revised average. Of the 53 states and US territories that report jobless claims, 38 reported declines, and 15 reported increases. Florida (-3,856), New York (-2,963), and California (-2,354) saw the most decreases. Missouri (+1,763) led with the largest increase in initial claims.

Thanks for reading Companies Have Pricing Power – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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