Should you invest in chocolate stocks?

Historians believe that the Ancient Mayans used cocoa beans as a form of currency, trading them and possibly even using them to pay workers. 

Centuries later, we prefer to eat the stuff – preferably in the form of a chocolate bar. But does chocolate still hold strong financial value? And do any of the chocolate stocks have a chance of making it into MoneyWeek’s weekly share tips?

Chocolate might sound like a niche area to invest in – but what you might not know is that Nestlé is actually the largest company in Switzerland. Similarly, Mondelez International (the US company which owns brands like Cadbury, Toblerone and Milka) is a Fortune 500 company. The same goes for Hershey. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Despite this, chocolate makers have faced challenges recently in the form of soaring cocoa prices. To protect their bottom line, they have been passing these costs on to shoppers. This comes on top of other inflation-related price hikes that households have already had to suffer, which begs the question: how high are consumers willing to go?

We look at what is causing cocoa prices to rise and the implications for chocolate makers. Are chocolate stocks a good bet this Easter holiday period, or will they leave a bitter taste in your mouth? 

What’s going on with cocoa prices?

Cocoa is one of the main ingredients in chocolate, with most cocoa (almost 70%) coming from crops in West Africa. Unfortunately, climate change has been wreaking havoc on the crop this year. 

The region has suffered a drought and high temperatures since February. El Niño, a naturally occurring climate pattern which results in warmer temperatures, has also been a factor. 

Cocoa prices have surged as a result. They are up 230% compared to a year ago, with cocoa futures reaching a record high of $10,080 per metric tonne on 26 March (an intraday price), before settling at $9,649 at market close.

What do surging cocoa prices mean for chocolate companies?

Rising cocoa prices are bad news for chocolate companies. Cocoa is the main ingredient in chocolate, along with sugar, and the fact that the majority of the crop is grown in West Africa means options are limited when the region is hit by challenging weather conditions. 

So far, chocolate makers have been protecting their profits by passing costs on to consumers. However, with a cost of living crisis going on, there is only so far shoppers can stretch. 

For example, Hershey took in an additional $745 million in 2023 compared to 2022 – but this was driven by higher prices rather than higher demand. Sales volumes actually fell by 1.3% over the course of the year as consumers bought less of the brand’s products. 

Unfortunately, all chocolatiers are in the same boat when it comes to this tricky price dilemma. A spokesperson from Nestlé told MoneyWeek: "In order to maintain quality and taste, it is sometimes necessary to make adjustments to the price or weight of some of our products."

Lindt & Sprüngli added that it has also had to make some price increases, with the high cocoa price being the main reason. "The price hike in cocoa will require further price increases in 2024 and 2025, assuming that cocoa prices remain at current levels," it said.

Is chocolate a good investment?

The good news for chocolate companies (and those who invest in them) is that consumer staples are more resilient in challenging economic periods than some other more discretionary goods and services. It is easier to roll back spending on things like holidays and luxury cars than on your weekly shop. 

While chocolate is a less essential item than many other food products, it is hard to imagine households cutting it out in a big way. The more likely alternative is that consumers begin shopping around for cheaper brands – potentially turning to discount retailers like Lidl and Aldi.

Warren Buffett, famous for his sweet tooth, once expressed his faith in the sector’s durability. He said: “I don't know what oil or wheat or soybeans or cocoa or anything like that's going to be selling for next week or next month or next year [... but] I do know people are going to be chewing Wrigley gum and eating Mars bars”. 

That said, keeping an eye on costs and prices will be important in determining each company’s success going forward. Issues with the cocoa crop could become more frequent as we start to experience the worst effects of climate change. Chocolate companies will need to manage these challenges effectively if they want to succeed.

A spokesperson from Nestlé outlined some of the steps it is taking as a business: “We have established long-term commitments and relationships with our suppliers, which can help provide farmers with long-term assurances and a sense of certainty in their business partnerships.” 

“Additionally, our Income Accelerator Programme aims to support all farmers in our supply chain in improving their cocoa productivity and agroforestry practices. We hope this will enable them to become more resilient and sustain cocoa production in the long term.” 

“We also have contingency plans in place to ensure continuous supply of our raw materials”, the company added.

Which chocolate stocks should you invest in?

When you first think of the chocolate brands that you know and love, names like Cadbury, Mars or even Hotel Chocolat might spring to mind. However, you can’t invest in any of these directly. 

Cadbury is owned by Mondelez International, having been bought by the company under its previous name (Kraft) in 2010. Mars is a privately-owned family business. And while Hotel Chocolat used to be publicly traded, it was acquired by Mars at the end of last year.

Some of the major chocolate makers you can invest in include Mondelez, Lindt & Sprüngli, Nestlé and Hershey. However, it is important to note that the investment story differs slightly from chocolatier to chocolatier. 

For example, Nestlé owns over 2,000 brands and has cereal, coffee and pet food items in its armoury. This makes it a very different buy to the likes of Lindt or even Hershey. 

We share some key stats on each:

 Source: Morningstar Direct, 25 March 2024. Total returns in GBP.  

The annualised five-year returns on Mondelez, Lindt and in particular Hershey all look pretty solid. A helpful benchmark is that the average stock market return over the long-term is around 10% per year, so all three are either in line with or exceeding this.

Hershey’s stock price has taken a bit of a beating since May 2023 though, and Nestlé’s since the start of 2022. This has partly been driven by investor fears around newly approved weight loss drugs from Danish pharmaceutical company Novo Nordisk. Investors are concerned that these weight loss drugs could prompt consumers to drastically alter their lifestyles – although there is currently little evidence to support this. 

Fidelity’s Sam Morse and Marcel Stotzel explain Nestlé’s recent stock market underperformance as being linked to “concerns on slowing volumes, particularly in pet food”. Morse and Stotzel are portfolio managers for the Fidelity European Fund and Fidelity European Trust PLC. 

They also point to the concerns around weight loss drugs, but add that they think this concern is overdone, “particularly in the context of Nestlé only generating c.20% of sales from snacks”. In other words, the company certainly isn’t a chocolate “pure play”.

The good news is that, going forward, they expect these headwinds to ease. If you agree, now could be a good time to snap Nestlé up at a lower price.

Should you buy premium chocolate stocks?

Back in 2022, MoneyWeek identified Lindt & Sprüngli as one of the world’s best stocks – but does the rationale still stand today?

At the time, we pointed out that making chocolate doesn’t require much investment, as the biggest cost is just the raw materials. We also said that, as a result, chocolate companies are able to pass on a large chunk of their profits to shareholders. 

Of course, rising cocoa prices have altered the landscape somewhat – but a spokesperson from Lindt told us that “customers remain loyal”, with the company experiencing a “slight volume/mix growth in 2023”, despite higher prices. 

If cocoa prices remain high, it is worth considering whether premium chocolate brands will be better able to pass cost increases on to consumers than more “budget” brands. Low prices are never going to be the main selling point for a brand like Lindt. 

One thing to bear in mind is that, a bit like its chocolate, Lindt's stock looks pretty pricey. With this comes the risk that the share price will fall if investors think it is approaching the top of the market. 

At present, a single share in the company will cost you more than CHF100,000. However, the good news is that many investment platforms now allow investors to buy fractional shares (a smaller portion of a stock) at significantly lower prices.

Don’t forget about dividends 

It is worth taking a look at the dividend that these companies are offering too. For example, while Nestlé’s stock price has taken a bit of a tumble in recent years, “the company remains a reliable Swiss franc dividend payer with defensive qualities”, according to Morse and Stotzel. 

Indeed, Nestlé is committed to growing its dividend each year – and while a current dividend yield of 3.11% might not look that enticing now when you can earn 5% on cash, it should start to look a lot more attractive again once interest rates start getting cut.