Why strong brands are stock market darlings

 
Will Railton
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Warren Buffett has long been an advocate of picking stocks with respected brands (Source: Getty)
The marketing industry is built around the understanding that a strong brand can drive sales and therefore deliver returns to shareholders. But new research from brand valuation consultancy Brand Finance has now put hard numbers behind this.

The consultancy releases an annual list of the world’s most valuable brands, the Global 500. In 2015, for example, Apple came out on top with a valuation of $128.3bn, followed by Samsung (at $81.7bn), Google ($76.6bn), and Microsoft (at $67.1bn). Twitter recorded the fastest rate of growth between 2014 and 2015, jumping a massive 185 per cent to $4.4bn.

But Brand Finance’s new research, released today, for the first time analyses these brand valuations against the respective companies’ stock performance and that of the wider S&P 500. Those companies which had a brand value to enterprise ratio of more than 30 per cent (in other words, firms whose brands were particularly valuable compared to the total value of their tangible assets) typically outperformed the S&P 500 by a wide margin.

If an investor had simply bought the shares of the US brands on the 2007 Global 500 with a brand value to enterprise ratio of more than 30 per cent, and held them until December 2015, they would have returned 60 per cent on their investment, compared to a 49 per cent return from the S&P 500 over the period. If the same investor had rebalanced their portfolio annually based on the Global 500 study, they would have returned a whopping 94 per cent.

Working out the value of a brand has become increasingly important in the context of mergers and acquisitions, and is crucial for solving intellectual property disputes. The first significant case was RHM, now Premier Foods, which leveraged the value of breadmaker Hovis to command a higher bid during a takeover in 1988. RHM held that the value of Hovis, the breadmaking brand held in high esteem by British consumers, hadn’t been factored in to the original offer.

Berkshire Hathaway chief executive Warren Buffett has long been an advocate of picking stocks with respected brands, and his portfolio contains names like Coca Cola (awarded a AAA+ rating by Brand Finance) and American Express. These established companies may not be hugely dynamic, but over long periods, the strength of their brands can ensure stable earnings growth. According to Zacks Investment Research, for example, analysts expect Coca Cola’s earnings to fall by 2.28 per cent in the year to December 2015, but to grow at an average annual rate of 5.96 per cent over the next five years.