Consumer staples stocks can be defined as a broad range of essential products that includes food, beverages, tobacco and hygiene products, among others.
With the novel coronavirus pandemic, the non-essential product demand has declined on a relative basis. However, demand for consumer staples remains robust.
This column will discuss four consumer staples stocks that look attractive in the current economic condition. Even beyond the pandemic, these stocks are worth holding in the portfolio as defensive bets.
Let’s look deeper into the following stocks.
- Costco Wholesale (COST)
- Procter & Gamble (PG)
- Campbell Soup Company (CPB)
- Philip Morris International (PM)
Among consumer staples stocks, I believe Costco Wholesale (COST) is a core portfolio stock. For the current year, COST stock has moved higher by 12% and I see more upside for the stock in the coming quarters.
Besides the potential for the stock moving higher, the company also has an annual dividend payout of $2.80. This is another reason to like COST stock.
From a business perspective, the company generated $3.5 billion in cash fees in the last 12 months. With 91% renewal rate in the U.S. and Canada, the company’s cash flow visibility is clear.
Another reason to be bullish on the company is commencement of operations in China. Considering the big market size and population, there is immense potential to increase the cash fee revenue from China in the coming years.
The company is also active on the e-commerce front. With a novel coronavirus pandemic, online shopping is gaining further traction and Costco is positioned to benefit. For the third quarter of 2020, the company reported online sales growth of 64.5%.
Procter & Gamble
Last month, JPMorgan analyst Mislav Matejka opined that he “favors shares of staples companies that produce goods most Americans deem necessary.” One of the shares mentioned was Procter & Gamble (PG).
I am in sync with this view and I believe that PG stock can be considered at current levels. Besides stability in revenue, PG stock is attractive for dividends. Also, the stock has a low beta and suitable for the portfolio after a big broad market rally.
With the coronavirus pandemic, there is an increased focus on health, hygiene and cleaning. The company’s global sales will benefit from this trend. For the third quarter of 2020, the company’s organic sales increased by 6% due to volume and pricing. This underscores my point on potential healthy sales growth in the coming quartets.
It’s also worth noting that the company’s sales from emerging markets like China, India, Africa and Latin America is just 25% of total sales. In the coming years, there is ample scope for sales growth in emerging markets. This will ensure that the company’s organic sales and earnings growth remains robust.
Overall, PG stock is attractive for defensive investors. With dividend growth to sustain, the consumer staples stock is worth holding.
Campbell Soup Company
CPB stock (CPB) is another name from consumer staples that is likely to deliver handsome returns in the coming quarters. At a price-earnings-ratio of 16.9x, CPB stock is attractive from a valuation perspective. Like the other consumer staples stocks discussed, the company also has an attractive dividend payout of $1.40 and a dividend yield of 2.8%.
According to a recent survey by Piper Sandler, the demand for packaged food companies is expected to remain strong “even in a post-pandemic world.” This trend is likely to be positive for Campbell Soup.
It’s worth noting that for the fiscal third quarter, the company’s meals and beverages segment witnessed organic sales growth of 21%. With a strong brand presence and continued product innovation, Campbell Soup is positioned for sustained growth.
From a balance sheet perspective, the company has been able to reduce leverage from 5.2 in Q4 2019 to 3.2 in Q3 2020. Debt reduction coupled with strong cash flows would imply further value creation for shareholders.
Philip Morris International
I like PM stock (PM) from a valuation perspective with the stock currently trading at a P/E of 15.2x. Besides the valuation factor, the company has a robust dividend pay-out of $4.68.
Looking at the business, a key reason to like Philip Morris is the company’s strong global presence. For 2019, the company derived 33% of revenue from key emerging markets and 11% from other emerging markets. These markets are likely to deliver a higher revenue contribution in the coming years.
Philip Morris has also been focused on non-combustible tobacco products. Recently, the U.S. Food & Drug Administration authorized the marketing of IQOS Tobacco Heating System from the company. In the coming decade, these smoke-free products are likely to deliver growth.
Overall, PM stock is attractive with a stable growth outlook, robust cash flows, a high dividend pay-out and attractive valuations.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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