The graying of America is accelerating, yet it feels as if no one is paying attention to the massive buying power of aging Baby Boomers.
The number of Americans 65 and older is expected to double by 2050, according to the U.S. Census Bureau, reaching nearly 84 million, or 20% of the population.
Globally, the phenomenon is even more striking; Euromonitor (an independent market research firm) estimates that by 2020 the spending power of consumers worldwide ages 60 and older will hit $15 trillion. Yet, Nielsen data show that only 15% of advertising dollars are spent marketing to seniors, despite their representing close to half of all sales of consumer goods.
For investors with long time horizons, it would be wise to keep this Silver Tsunami 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 trend:
1. Amazon (AMZN)
As Boomers age, their preference naturally will shift toward the convenience of ordering online rather than driving to the store. Macquarie’s investment bank estimates that Jeff Bezos’ e-commerce machine now captures more than 50 cents of each incremental dollar spent online. Twenty years of reinvestment in the online shopping behemoth are finally expanding margins and generating triple-digit free cash-flow growth. Amazon clearly sees opportunity in the underserved Baby Boomer market, boasting a “50+ Active & Healthy Living” division offering items such as vitamins, skin-care products and blood-pressure monitors.
Despite Amazon’s size — approaching $150 billion in annual revenue and $400 billion in market capitalization — Bezos continues to innovate. The recent success of Amazon’s Alexa/Echo device exemplifies Bezos’ ability to create an entire product category quickly (smart home assistant), capturing dominant market share. The company estimates that sales of the device increased ninefold in 2016 compared with the 2015 holiday season.
Bezos also quickly signed deals with Wynn Resorts and Ford Motors to place Alexa in all Wynn hotels and in some Ford cars and trucks. Other long-term growth drivers for Amazon include Prime Video — their alternative to Netflix — and Bezos’ continued forays into logistics (read drones), which could slowly whittle costs down over time, paring back their reliance on UPS and FedEx delivery.
Most important, Amazon still has decades of runway left as global retail sales shift online. Exhibit A: e-commerce, which has grown 8% of total U.S. retail sales from under 1% in the year 2000. Digital research firm eMarketer estimates this figure will hit 15% in 2020 with e-commerce sales continuing to grow high-single digits beyond 2020. With Amazon expected to capture more than 50% of this growth, no other e-commerce company is as well-positioned.
2. Home Depot (HD)
Most investors are unaware that Home Depot has been the second-best performing U.S. listed stock of the last 30 years, with a minimum market cap of at least $50 million. (No. 1 is an obscure chemical company, Balchem.) Over that time, Home Depot’s shareholders have enjoyed a cumulative total return of nearly 68,000% or about 24% annualized, including dividends. The business — which has relied on do-it-yourself Boomers for nearly half of its revenue — should continue to grow.
Why? As the Woodstock Generation enters retirement, they aren’t flocking to Florida or Arizona as their parents and grandparents once did. They are more willing to stay put in their current homes to be closer to grandchildren and lifelong friends. The Department of Housing and Urban Development says the median age of owner-occupied homes in America is 37 years old, compared with 27 in 1993, with 63% of homes 30 years or older. These trends are honey to the home-improvement industry, and both Home Depot and Lowe’s should benefit as the two giants combine for a whopping 60% of industry revenue.
While many Boomers are happy to do some of their own home-improvement work, they aren’t house-poor anymore. Result: There is a large and growing “do-it-for-me” market opportunity for remodelers. Home Depot took notice last year, ramping up its small contractor program, which helps fix up customers with home-improvement professionals through workshops, on-site equipment delivery, bulk pricing and flexible credit options. If there has been lost business from Boomers, it hasn’t shown up in Home Depot’s financial statements: Same-store sales have accelerated to an average increase of about 5.5% in the past six quarters, vs. a 4.6% five-year average.
My hunch: Home Depot will continue to benefit directly from the graying of America for decades as their customers age. Home Depot’s revenues are forecast to clear $100 billion in 2018, based on at least 5% annual growth from 2016 levels, and the stock offers a $2.76 annual dividend (2% annual yield), which has grown about 20% per year over the last five years.
3. Apple (AAPL)
A common misconception among marketers is that seniors are frugal and frightened of computers, so sales efforts are better directed toward younger, affluent customers. On the contrary, Nielsen has found that more than 40% of Apple’s products are bought by Boomers. Men ages 65 and up spent more time on Apple devices in 2015 than any other demographic group, according to e-commerce market research firm Slice Intelligence. Apple’s legendary innovation and attention to product development has helped it cultivate a devoted fan base that has no problem regularly paying more than $1,000 for new iPhones and MacBooks.
Apple has also done a brilliant job building out their services segment. Think Apple TV, iCloud, Apple Pay and the continued success of the App Store (now growing revenues over 30% per year). Samsung’s Note 7 recall because of a potentially combustible battery flaw couldn’t have come at a better time for Apple, as it rolled out the iPhone 7. Many analysts are already predicting the iPhone 8, to be unveiled in September 2017, will begin a new Apple “supercycle” and outsell the iPhone 6 by a wide margin due to a larger subscriber base. Apple stock remains attractively priced at 15x trailing earnings — a below-market multiple vs. the S&P 500 — and pays a $2.28 annual dividend (1.9% yield). The house that Jobs built still rests on a firm foundation for future growth.
Greg Blotnick is an equity analyst at an asset management firm in New York. Blotnick holds an MBA from Columbia Business School, a B.S. in Finance from Lehigh University and is a CFA Charterholder. Follow him on Twitter at @Greg_Blotnick. Blotnick’s firm has no position in the securities mentioned.