The Best Way to Invest in Aging America

baby-boomersThere are many ways to invest in the aging of America, but adult diapers may prove to be the most intriguing possibility yet. 

The rapid aging of Baby Boomers is a well-told story.

Baby Boomersindividuals born between the years 1946 and 1964— make up a large part of the current population. And they’re getting old, in a hurry. The number of individuals 65 or older in the U.S. is expected to double by 2050. 

From assisted living centers to generic drugs, there’s a number of ways to play this rapid aging of America as an investor, those might not even be the best ideas.

The No. 1 investment idea for the aging of America is: Adult Diapers.

Yes, you heard me right. Diapers.

For the four years ended 2013, adult incontinence product sales in the U.S. rose 20%, while baby diaper revenues were down 8% for the same period. This is a trend that’s sure to continue.

Adult diapers is a better business than baby diapers for a number of reasons besides the large market opportunity. One, individuals are living longer. And two, those suffering from incontinence generally need products for much longer than the few years that toddlers do. 

Because of this, one of the world’s largest household products companies is getting back into this market. 

Procter & Gamble (NYSE: PG) announced earlier this month that it was re-entering the adult diaper market after exiting that business more than a decade ago. 

P&G is looking to get back into this business for good reason. This part of the market will grow much faster than toothpaste and deodorant over the next decade. 

P&G is the market share leader for baby diapers, with its Luvs and Pampers brands. In the adult incontinence market, you also have Kimberly-Clark (NYSE: KMB), which owns the space. It has over half the market share by revenues for the adult diaper space via its Depend and Poise brands. 

But P&G might have the advantage.

P&G is introducing adult diapers via its Always brand. This is a leading brand in feminine care. Introducing its incontinence products via a brand that caters to women is a very strategic move. 

It just so happens that women account for over 85% of sales in the incontinence product market. P&G believes that 1-in-3 women over 18 years old suffer from a form of incontinence. But only 1-in-9 use an incontinence product. 

With its global presence, multi-billion marketing budget, and established brand name, it’s very likely that P&G will be able to steal market share from current players. It’ll also be able to capture new consumers coming to market over the next few years. 

However, for big dumb companies like P&G and Kimberly-Clark, it can be tough to grow revenues faster than GDP (gross domestic product) or cut costs enough to impact the bottom line. 

But P&G is making strides in the right direction. Basically, P&G is going to split its company. It plans to divest more than half its brands, expecting to end up with 70 to 80 businesses after having sold off underperforming businesses. 

I think this could be a game changer. It’s already getting started too, with recent news that it’s looking to unload the Braun shaver and Duracell battery brands very soon. 

The biggest question will be whether it’ll be enough to move the needle. P&G generates over $80 billion in revenues annually. It already has some 25 brands that generate $1 billion in revenues each, and it plans on making its adult diaper business number 26. 

For investors with more of a risk appetite, Tredegar (NYSE: TG) is another stock to capitalize on aging America. 

P&G’s annual revenues are over 80 times that of Tredegar. But Tredegar has a unique business. 

P&G’s success will be Tredegar’s success. P&G is Tredegar’s largest customer, accounting for roughly 28% of its annual revenues.

Tredegar’s key business is film products for personal care items. It produces materials for the manufacturing of feminine hygiene products, baby diapers and adult incontinence products. Film products for personal care accounts for around 37% of Tredegar’s sales.

The famed “Super Mario,” Mario Gabelli, and his Gamco Investors investment firm own just over 14% of Tredegar.

Via its other businesses, Tredegar also has exposure to building and construction, transportation and electrical markets. This includes the fast-growing tablet and smartphone market, where Tredegar’s products are used to protect flat panel displays during the manufacturing process. 

Tredegar is down 27% year-to-date. However, from an investment perspective, it remains very appealing. 

Shares trade at a P/E (price-to-earnings) ratio of 23.6, which is higher than either P&G or Kimberly-Clark. However, when you factor in Wall Street’s expected earnings growth, Tredegar is the much better pick.

It trades at a P/E-to-growth (PEG) ratio of just 1.1. Meanwhile, P&G trades at a PEG ratio of 2.4 and Kimberly-Clark’s is 2.9. 

The thing about P&G and Kimberly-Clark is that they are income plays. Both offer dividend yields of 3.1%. Kimberly-Clark has upped its dividend every year for 41 straight years and P&G has a 57-year streak. 

Adult incontinence is a sensitive subject. As a result, it’s a highly underrated investment idea. Given this, and the sheer size of the potential adult diaper market, it’s easily the No. 1 investment idea for capitalizing on the aging of America. 

More risk averse investors should buy one of the best dividend payers around to get exposure to the adult diaper market: P&G is over 300 times the size of Tredegar in terms of market cap and offers a 3.1% dividend yield. However, Tredegar is compelling for investors that don’t mind a little volatility, offering growth and income —with a 1.7% dividend yield. 

Investing can be a dirty business —literally. But at the end of the day, the best investors are able to put their emotions aside when looking for great opportunities. Investing in adult diapers just may be one of them.

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