Consumer-staples stocks have outperformed the broader market over the past year, but cooler returns lately have made some of these stocks a little more attractive for income investors.
The nearly $14 billion Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has returned about 5% over the past three months, besting the S&P 500 index’s (.SPX) 3.6% result. Over the past 12 months, it has gained about 13%, dividends included, easily outpacing the broader market’s 4.7% return.
“We continue to view staples as a decent place to hide where you have some defense, you have quality cash flow, and you have growing dividends—though you don’t necessarily have a ton of growth,” says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Helping lift stock performance in the group has been better operating performance for bellwethers such as Procter & Gamble (PG). Another tailwind has been the decline in the 10-year U.S. Treasury note’s yield, which went from 3.2% last November to below 1.5% early this month and is around 1.75% now. Bond yields and prices move in opposite directions.
The consumer-staples sector, considered a bond proxy because of its solid yields and relatively stable income streams, can offer attractive dividends that are growing steadily, if not robustly.
The accompanying table lists six such stocks, all with yields above 2%. All of these companies have increased their dividends in each of the previous three fiscal years and sport market capitalizations above $20 billion.
It’s important, though, not to get lulled into a false sense of security with the sector. Kraft Heinz (KHC) meets all of those criteria, as well. But in February, the company slashed its dividend by 36%, to 40 cents a share, and took a $15 billion write-down on key assets. The stock, which now yields 5.6%, is down about 30% in 2019.
As that situation attests, these companies aren’t risk-free. Many are vulnerable to a strong dollar, carry big debt loads, and have had weak earnings growth.
Barron’s also eschewed tobacco companies because, their huge yields aside, they arguably belong in a different category from other staples due to their challenged growth in some markets and regulatory pressures.
Several companies, including Estée Lauder (EL) and McCormick (MKC), didn’t qualify for the list because their yields were too low. Our cutoff was 2%, which is the average yield for the S&P 500.
Most of the companies highlighted share some common traits, notably stock valuations that exceed the broader market’s and modest dividend growth.
But they also differ in some key ways—namely, dividend growth. Increasing dividends is an extension of earnings growth, but that has been harder to come by for some of these companies.
For example, Citi Research estimates that U.S. beverage makers will have organic-sales growth of 4.9% on average this year and 4.5% in 2020. But the average is more muted for U.S. food companies such as Kellogg (K), with organic-sales growth pegged at 1.8% this year and 2.2% in 2020.
Against this backdrop, Procter & Gamble looks like a strong candidate for investors to consider. Citi Research estimates that P&G will increase its organic sales by 5% this fiscal year, compared with a 1% gain last year. Organic sales exclude recent acquisitions.
Helped by that growth, P&G’s stock has returned nearly 50% in the past year.
In an Aug. 30 research note, Morgan Stanley analyst Dara Mohsenian asserted that the company’s “organic sales growth trajectory has sustainably improved,” helped by rising market share. He adds that improving gross margins should help the company raise its earnings faster than its competitors.
The FactSet consensus earnings estimate for P&G’s current fiscal year, which ends next June, is $4.86 a share, compared with $4.52 previously. That would be an increase of 8%. The dividend is expected to rise to $3 a share from $2.90, up about 3%. The stock currently yields 2.5%.
Another of Morgan Stanley’s top picks is Coca-Cola (KO), which trades at more than 25 times its 2019 profit estimate—a premium to the broader market’s multiple of about 18. The company, Mohsenian notes, “offers a clearly superior top-line growth outlook” than its peers.
The beverage giant has had uneven earnings growth in recent years as soda has fallen in popularity and other drink categories have gained favor. Although Coke has diversified its portfolio, it still depends heavily on sparkling soft drinks.
The company earned $2.08 a share last year, up from $1.91 in 2017 and 2016. The consensus for this year is $2.11 a share.
Coca-Cola is generating a lot of free cash to support its dividend. It totaled about $6 billion in 2018, according to FactSet. In 2018, it paid out about $6.6 billion of dividends on its common stock, testament to its cash flow.
The stock, which yields about 3%, has a one-year return of about 20%.
Another soda company that could present a lucrative yield play is PepsiCo (PEP), which has moved aggressively into the more attractive snacks category and now accounts for nearly two-thirds of its profit.
The stock, which yields 2.8%, has a one-year return of about 20%.
In April, the company’s board declared a quarterly dividend of 95.5 cents a share, up 3%. In May 2018, the dividend was boosted by 15%, to 92.75 cents a share. Morgan Stanley expects that the company “will post superior top-line growth relative to peers driven by exposure to the higher growth/higher margin snacks category.”
The FactSet consensus 2020 profit estimate is $5.96 a share, up 8% from what the company earned in 2018.
Kimberly-Clark (KMB), whose brands include Scott paper towels, is expected to increase its earnings by 6% next year to $7.23 a share. That should support a higher dividend of $4.09 a share, up 4%, according to FactSet.
The stock, which is up about 16% this year, yields 3.1%. The remaining stock on the list, Colgate-Palmolive (CL), has a one-year return of about 5%; it yields 2.4%.
These stocks may not look that exciting, but they do appear pretty dependable when it comes to paying and boosting their dividends.
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