The graying of America is accelerating, yet it feels as if no one is paying attention to the massive buying power of aging boomers. A 2014 Census Report states that the number of Americans 65 and older is expected to double by 2050, reaching nearly 84 million or 1/5th of the population. Globally, the opportunity is even more impressive; Euromonitor estimates that by 2020 the spending power of consumers aged 60 and older will hit $15 trillion dollars. However, millennials continue to receive a disproportionate amount of attention – both from the media and from corporations – relative to buying power. Nielsen data shows that 15% of advertising dollars are spent marketing to seniors despite their representing close to half of all consumer-packaged good sales.
For investors with long time horizons, it is crucial to keep this demographic backdrop in mind when constructing a portfolio for retirement. I believe there are three companies that are exceptionally well-positioned to take advantage of this powerful, multi-decade secular trend:
1. Amazon, Inc. (NASDAQ:AMZN) - As boomers age, their preference naturally shifts towards the convenience of ordering online rather than driving to the store. Jeff Bezos' e-commerce machine now captures over 50 cents of each incremental dollar spent online and twenty years of reinvestment are finally showing up in the form of margin expansion and triple-digit free cash flow growth. Amazon has taken note of the underserved baby boomer market and boasts a “50+ Active & Healthy Living” division offering items such as vitamins, skin-care products and blood-pressure monitors.
Despite the size of the business – approaching $150 billion dollars in annual revenue and $400 billion in market capitalization – Bezos continues to innovate and run Amazon as if it were a nimble start-up. The recent success of Amazon’s Alexa/Echo device exemplifies Bezos’ ability to create an entire product category (smart home assistant) and capture dominant market share as a result. To entrench their competitive position for years to come, Bezos quickly inked deals with Wynn Resorts and Ford Motors to ensure that Alexa is installed in all Wynn hotels and in multiple Ford models. Other long-term growth drivers for Amazon include Prime Video – their threat to Netflix (NASDAQ:NFLX) – and Bezos’ continued forays into logistics, which should slowly whittle costs down over time as they work to disintermediate UPS and FedEx (NYSE:FDX).
2. Home Depot (NYSE:HD) – Most investors are unaware that Home Depot is the 2nd-best performing stock of the last 30 years, with a cumulative return of nearly 68,000% or ~24% annualized. The business’ growth shows no signs of abating as boomers entering retirement will spend free time fixing up their homes or spending money on second homes to renovate.
Home Depot’s management is keenly aware that baby boomers are crucial to their business – this age group makes up the majority of their non-professional customers and is responsible for about half of the firm’s revenue. While many boomers are happy to do their own home improvement work, there is a large and growing “do-it-for-me” market opportunity that until now remained unaddressed. Home Depot took notice last year and quickly ramped up their small contractor program, offering home improvement workshops for professionals, job site delivery, bulk pricing and flexible credit options. This allows Home Depot to continue benefitting directly from ‘The Graying Of America’ even if their valued customers no longer visit the store personally.
Home Depot’s revenues are forecasted to hit $100 billion in 2018 and the industry enjoys other long-term secular tailwinds in an aging U.S. housing stock and a boom in new household formation. The stock offers a 69 cent dividend (2% annual yield) which has traditionally grown at 15-20% per year.
3. Apple Inc. (NASDAQ:AAPL) - A common misconception amongst marketers appears to be that seniors are frugal, and so sales efforts are better directed towards younger affluent customers. On the contrary – Nielsen data has found that over 40% of Apple’s products are bought by boomers. Men aged 65 and older spent more on Apple devices in 2015 than any other demographic group, according to Slice Intelligence. Apple’s legendary innovation and attention to detail has helped them cultivate a devoted fan base that has no problem regularly paying over $1000 for new iPhones and MacBooks.
Apple’s continued dominance is a result of both sharp strategic planning by management and poorly-timed blunders by their competition. The firm has done a brilliant job building out their services segment which keeps consumers entrenched within the Apple ecosystem via Apple TV, iCloud, Apple Pay and the continued success of the App Store (now growing revenues over 30% per year). Samsung’s Note 7 was poised to steal market share from Apple before a fatal battery flaw surfaced which caused the phone to overheat and catch fire. The Note 7 was quickly recalled and the timing couldn’t have been more fortuitous for Apple as they rolled out their own offering in the iPhone 7. The iPhone 8 is forecasted to be the next Apple “Supercycle” and should outsell the iPhone 6 by a wide margin due to a larger subscriber base. Currently, Apple is attractively priced at 15x trailing earnings – a below-market multiple versus the S&P 500 - and pays a 57 cent annual dividend (1.9% yield).