Just one year ago, the group of five FAANG stocks was on top of the world. The cohort’s shares had climbed 52% over the previous 12 months, handily besting the S&P 500 ’s (.SPX) 13% rise over the same period. Investors giddily piled into the buzzy technology names— Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Google parent Alphabet (GOOGL)—enamored with their explosive user growth and booming revenues.
A counter-index of the five largest nontobacco consumer-staples names looked downright shabby in comparison. The so-called WPPCK group— Walmart (WMT), Procter & Gamble (PG), PepsiCo (PEP), Costco Wholesale (COST), and Coca-Cola (KO)—rose just 6% from summer 2017 to summer 2018, not including dividends.
In the past year, though, the FAANGs have climbed 5.7%, while the S&P 500 is up 7.2%, and the WPPCKs have risen 27.1%—again, not including dividends.
In times when investors have their sights set on the future of communication, mobility, or entertainment, companies that sell soda, toothpaste, and laundry detergent to budget-conscious consumers prove less of a draw. But when economic conditions get a bit hairier and the market outlook becomes clouded by trade wars and other potential crises, boring, stable dividend-payers become a whole lot more appealing.
After all, people still need to brush their teeth and do laundry even if a trade war rages. And if economic growth meaningfully slows and consumers feel the pinch, low-price retailers could see their store traffic rise.
Further juicing the WPPCK rally since the start of May has been the steady rise in expectations of lower interest rates on the horizon. That’s made the group’s dividend yields more attractive to income-oriented investors, versus those of bonds like the 10-year Treasury, whose yield recently dipped below 2%.
Coca-Cola stock delivers a 3.1% yield, PepsiCo pays 2.9%, and P&G yields 2.7%. With the exception of Apple’s 1.5% yield, the FAANGs are dividend-free. The WPPCK stocks are up 5.8% since the start of May, versus a 3.6% decline for the FAANG stocks.
The S&P 500 notched new all-time highs on June 20, and several defensive sectors—including utilities, real estate, and consumer staples—are all near record levels as well. Lori Calvasina, RBC Capital Markets’ head of equity strategy, says her clients’ interest in consumer staples has picked up in recent months. For many investors looking to take a defensive posture, the group is more attractive than utilities because its potential growth prospects mean it isn’t just a place to stash funds and collect a quarterly payout.
Dividend-payers tend to outperform during periods when the Federal Reserve is reducing interest rates, according to Calvasina, who notes that staples’ current yield is above its long-term average. The sector outperformed the broader market amid the rate-cutting cycles of the early and mid-1990s and the post-tech-bubble easing.
Since upgrading consumer staples to Overweight last September, Calvasina has seen an improvement in sentiment surrounding the sector. An over-80% beat rate on earnings per share in the first quarter reassured investors and analysts. Inflows into consumer-staples exchange-traded funds like Consumer Staples Select Sector SPDR (XLP) have been steadily positive in 2019, suggesting sustained demand for the sector’s shares, not choppy overreactions to one-time events.
And although consumer staples’ recent run has certainly made the sector appear pricier relative to the S&P 500, Calvasina says there’s still room for multiple expansion, citing metrics such as price-to-free cash flow and price-to-book ratios.
While the stocks’ outperformance might not be as pronounced moving forward, relative insulation from trade war pain, low election-related risk in 2020, and declining interest rates should keep the WPPCK group—and consumer staples in general—in investors’ favor versus the faster-growing but potentially riskier FAANGs.
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