You probably use several products every day that are touched by IFF. The company has a presence in thousands of consumer products, yet it has largely flown under the radar operating in the chemicals industry. We like boring, durable businesses that can predictably pay us more income every year, and IFF certainly checks these boxes.

We added IFF to our Long-term Dividend Growth Portfolio earlier this year. While the stock trades at a premium relative to the market today, we continue to believe the company is a solid long-term holding that will reward investors with double-digit dividend growth for years to come.

Business Overview

IFF was founded over 125 years ago and is the behind-the-scenes company that works with the world’s leading consumer brands to create scents and tastes used in thousands of household products. The company’s product portfolio is split roughly 50/50 between fragrances and flavors. Fragrance products are used in soaps, detergents, lotions, lipsticks, deodorants, air fresheners, perfumes, colognes, and other products. Flavor products are used in beverages, candies, baked goods, desserts, prepared foods, dairy products, pharmaceuticals, oral care products, and more. The business is very international, with almost 80% of sales coming from outside of the US and about 50% of revenue coming from emerging markets.

Business Analysis

IFF is very entrenched with its customers. Academic studies have shown that scent and flavor are two of the most important factors influencing consumers’ purchases of packaged food or household products, so it’s no surprise that IFF’s compounds are really important to a company’s brand. Importantly, IFF’s products also represent a small proportion of a customer’s total product cost, allowing IFF to enjoy strong pricing power.

Many of IFF’s compound formulas are unique to the customers that use them. A company such as P&G that has found a winning detergent scent with IFF doesn’t want anyone else using that fragrant compound, leading to a sticky and long-lasting relationship with IFF.

The research and development process required to create certain scents and tastes is also very intensive. IFF routinely spends between 8% and 9% of its sales on R&D. The goal is recreate a particular taste or scent by using computers to identifying hundreds of molecules from different foods. Next, a group of molecules is formed by IFF to recreate that taste while complying with regulations and a customer’s budget. Many times these molecules have nothing to do with the initial food or product. Once the optimal molecule “recipe” has been created, IFF will create an artificial synthetic version and a natural version. The company works with thousands of different raw materials to help it with this process and regularly collaborates with biotechnology firms to develop low cost, natural ingredients.

According to the Wall Street Journal, food and beverage companies have increasingly outsourced produce development to companies such as IFF. Today, around 80% of all flavors are outsourced because they make up such a small portion of a product’s cost. This requires IFF to conduct significant field research to gauge changing consumer preferences and help its customers maintain strong brands in the marketplace. To this point, IFF actually has more “creative centers” (31) than it does manufacturing facilities (29) to ensure its staff is on top of local consumer trends.

Finally, the industry’s structure is also attractive because it has gradually been consolidating over the past few decades. Today, the top four companies (Givaudan, IFF, Firmenich, and Symrise) account for nearly 70% of the industry’s sales. Each company is focused on profitable growth, and the sensitive nature of customer relationships and formula IP have limited the industry’s pace of change. As regulations increase, consumer brands become increasingly international, and more R&D is required for natural products, further industry consolidation is likely.