Three High-Quality Businesses Adapting To And Benefiting From The Pandemic

The COVID-19 pandemic of 2020 has been an extremely unfortunate event.

With lives and livelihoods lost, it’s been a brutal year for too many people.

I’m sure all of us wish this situation would have never happened.

But we have to deal with the reality we’re given and make the most of it.

As an investor, it’s been crazy. I’ve had to contend with the most rapidly evolving environment I’ve ever seen. I must say, after investing for a decade now, I’ve never experienced anything like this before. I’ve definitely been on my toes.

I’m personally invested in more than 100 different businesses through my real-money stock portfolio. This portfolio produces enough passive dividend income for me to live off of in my 30s.

Since I’m invested in such a wide swath of the global economy, I’ve had an opportunity to see exactly how the pandemic has affected businesses large and small.

Now, some businesses have been impacted negatively by all of this. However, most of that impact appears temporary in nature.

On the other hand, I’d say that most businesses I’m invested in have been relatively unscathed.

That’s because I invest in high-quality businesses that have lengthy track records of growing profit and growing dividends. These growing dividends are paid through thick and thin.

Only companies providing the world with the products/services it demands are able to do this. These companies are some of the best in the world.

After all, you don’t put yourself in a position to pay out growing dividends for decades on end by running a poor business that can be easily upended.

This proven durability is a big reason why I’m a dividend growth investor.

And it’s why I’ve been so vocal about the strategy, even going so far as to discuss it at length in two best-selling books: The Dividend Mantra Way and 5 Steps To Retire In 5 Years.

Now, unscathed is good.

But it can and does get better.

Taking things to the next level, there are some really high-quality companies out there that are actually benefiting from the pandemic in a permanent way.

I’ll give you three quick examples from my own portfolio.

While these aren’t the only businesses adapting to and benefiting from the pandemic, I do think they’re standouts for a variety of reasons. Furthermore, all three stocks have recently hit all-time highs.

Starbucks Corporation (SBUX)

This might come as a surprise. Coffee shops across the world were shut down for a period of time.

Well, that can’t stop Starbucks. Starbucks ought to rename the company Bigbucks. Because they continue to rake in the money no matter what.

The pandemic has served to benefit them over the long run. It’s been some short-term pain for long-term gain.

Starbucks has accelerated its digital transformation as a result of the pandemic. When customers were no longer able to use Starbucks in a traditional way, the company saw that as a sign to crank up their digital initiatives that had already been going.

This is now the 21st century coffeeshop. They’re using tools like Mobile Order & Pay, Rewards, pick-up, delivery, and even AI across digital platforms to keep customers engaged.

They’ve cemented their place as the “go-to” coffeeshop for customers by selling value and adapting to customers’ needs. In addition, smaller coffeeshops that are unable to withstand the pandemic challenge are closing, which means less competition in 2021 and beyond. The strong tend to get stronger.

The company held its 2020 Investor Day on December 9, and they impressed across the board.

They’re anticipating 8%-10% sales growth through 2024, driven largely by comp growth (4%-5% globally). They see 10%-12% EPS growth for 2023 to 2024.

While others are closing, Starbucks is expanding. They opened 250 stores in China during Q4 FY 2020 – a record.

They’re also expanding their dividend: Starbucks increased the dividend by almost 10% at the end of September.

Starbucks will likely end up doing even better over the next decade than they would have had the pandemic never occurred.

Walt Disney Co. (DIS)

Disney is interesting.

You do have parts of the business that has been severely impaired by the pandemic – namely, the theme parks.

But one of the things I absolutely love about Disney is their ability to adapt and innovate. They’ve been around for almost a century in no small part because of this ability.

We have yet another company that has accelerated its digital transformation. If you’re starting to see a pattern develop, you’re paying attention.

This digital transformation started before the pandemic, with an importance launch of their DTC streaming platform Disney+ occurring in late 2019.

However, they’re doubling down on this platform by massively ramping up content creation, reorganizing the business to better focus on streaming, and prioritizing subscriber growth over older media delivery options. As a result of the pandemic, Disney is almost certainly pivoting more aggressively than it otherwise would have.

This is working to their advantage, as consumer habits around media consumption were already changing. Those changes are also being accelerated, with people spending more time at home. Streaming was the future for Disney. It’s just that, well, the future arrived quickly.

To that point, the Disney+ platform is positioned extremely well. And it’s wildly exceeding expectations thus far.

Disney originally guided for 60-90 million Disney+ subscribers by 2024. They’ve already hit almost 87 million subscribers. That means they hit the upper end of their target four years ahead of schedule.

Disney now expects 230-260 million subscribers by 2024, which will be aided by a tremendous amount of exclusive content.

This is a jaw-dropping number.

To put that into context, competitor Nextflix Inc. (NFLX) has approximately 200 million subscribers. But it launched their streaming service in 2007, which means it took them 13 years to get there. Disney might exceed that level in only a few years.

Once vaccines roll out widely and the pandemic is defeated, Disney’s pandemic-affected businesses like theme parks will be fully operational once more. At the same time, they’ll also have a world-class streaming service to go along with everything else in their enviable flywheel – a flywheel that makes everything within it stronger than it’d be independently. They’ll be positioned much better coming out of COVID-19 than they were going into it.

The market seems to agree with that assessment, sending the stock up more than 13% on December 11 (the day after the Disney+ updates came out).

The only bummer about Disney, as a dividend growth investor, is the fact that they’ve temporarily suspended their dividend. However, they plan to restore the dividend in 2021. Once again, this is short-term pain for long-term gain.

Nike Inc. (NKE)

Nike, like the other two businesses discussed above, started its digital transformation years ago. They’ve been heavily investing in their e-commerce prowess for a while now.

But the pandemic has served as an opportunity to accelerate that digital transformation. Improvement and synchronization across their digital platforms have taken on a sudden priority.

Let’s check in and see how that’s going.

Nike reported FY 2021 Q1 results on September 22.

Nike Brand digital sales increased 82 percent.

Yes. That’s almost 100 percent.

Diluted EPS increased by 10% YOY. We’re talking about double-digit bottom-line growth during a global pandemic.

I don’t know how it could get any more impressive.

Well, how about a double-digit dividend raise?

Okay. Nike increased its dividend by over 12% at the end of November.

What’s happening here is that Nike is benefiting from a one-two punch.

There’s the digital acceleration that takes advantage of the way customers want to engage. This is a margin-boosting move that keeps consumers entrenched in Nike’s ecosystem.

But the other benefit comes from the emerging work-from-home theme.

Now, I have my doubts about how lasting this whole WFH thing is really going to be. My opinion is that human beings are extremely prone to recency bias, which makes them believe that whatever is happening now is likely to persist forever.

Regardless, any incremental increase in working from home benefits Nike by virtue of a natural attire preference. Nobody is going to opt into dressing up if they don’t have to.

For example, I’ve been “working from home” since 2014, after quitting my full-time job in the automotive industry at the age of 32 in order to focus on creating content online as I chased after financial independence and early retirement.

What do I wear nowadays?

I wear Nike daily. You can see me wearing this clothing in every YouTube video I’m in. Athleisure attire is comfortable, and I can stroll right from a coffeeshop over to the gym and get my afternoon workout in.

An acceleration in the digital transformation backed up by the WFH theme bodes very, very well for Nike. This is another business that is likely to end up doing even better over the next decade than they otherwise would have if a pandemic hadn’t occurred.

What do you think? Are these three businesses adapting to and benefiting from the pandemic? Why or why not?

Thanks for reading.

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