By Lawrence C. Strauss
Stock performance for the consumer-staples sector has been mixed this year.
Nevertheless, there's no shortage of stocks with attractive yields and secure dividend growth, such as Procter & Gamble and Colgate-Palmolive.
Stephanie Link, chief investment strategist at Hightower Advisors, cautions investors to be selective. "There are a couple of winners," she says. But "for the most part, a lot of them are lagging."
That's because of various negative factors. They include pricing pressure after several years of companies putting through big increases, ongoing worries about the ramifications of weight-loss drugs, and more-recent concerns about what impact Robert F. Kennedy Jr. could have on ingredients allowed in various food products if he's confirmed to oversee the Department of Health and Human Services. There's also the specter of more tariffs after President-elect Donald Trump takes office next month.
On top of that, the sector has fallen in favor as many investors flocked to sectors with more growth, like technology. Consumer-staples stocks have trailed this year, returning about 19%, including dividends. That's a good result on the face of it, but it lags behind the S&P 500 index's 29% result.
Much of the sector's performance this year, however, has been driven by a handful of large-cap stocks that include Procter & Gamble, Walmart, Costco Wholesale, Philip Morris International, and Altria Group, observes Chris Senyek, chief investment strategist at Wolfe Research.
Many other stocks in the sector have also trailed the S&P 500. Kraft-Heinz is off about 10% this year, including dividends, and Conagra Brands is up about 3%.
To some investors, that weak performance spells good opportunities for some dividend stocks.
"If you believe that Americans will keep eating despite GLP-1s [weight-loss drugs] and that RFK can only get so far in forcing America to curb caloric intake, then many of these stocks offer a compelling mix of valuation and dividend yield," says Jenny Harrington, CEO and portfolio manager at Gilman Hill Asset Management.
She recently added Conagra to her equity income holdings. Shares of Conagra, whose brands include Duncan Hines, Birds Eye, and Slim Jim, recently yielded about 5%.
When Harrington purchased the stock, it was trading at an attractive valuation of about nine times what she expects the company to earn in 2025. She thinks that the dividend, currently at $1.40 a share annually, will grow at a 3% annual clip.
One of the company's attributes, Harrington wrote in a recent letter to clients, is healthier food offerings, such as Udi's gluten-free breads.
Senyek of Wolfe Research says that "from a dividend perspective, there's some attractiveness within staples."
He points out that the largest sector in the S&P 500 Dividend Aristocrats Index is consumer staples, at about 24%, slightly ahead of industrials. The constituents of this index, which include Clorox, Hormel Foods, and Kimberly-Clark, have paid out a higher dividend for at least 25 straight years -- a mark of financial stability and consistency.
Senyek says that the Aristocrats are relatively cheap, recently trading at about a 10% discount to the S&P 500. He adds that the Aristocrats, compared with stocks with high yields, have outperformed following the first interest-rate cut in a cycle over six- and 12-month periods. The Federal Reserve's first rate cut in this cycle occurred in September.
Even though the consumer-staples stocks in the S&P 500 have notched a collective double-digit gain, that doesn't tell the whole story. The sector consists of subgroups that include household products, food, beverages, and tobacco.
They each have different exposures to overhangs such as GLP-1 drugs, tariffs, and any push to ban more food ingredients.
U.S. household-product companies have performed the best in the staples sector this year because that group "is much more insulated from many of these issues," says Filippo Falorni, lead analyst for beverage and household products companies at Citigroup.
Stocks on which Falorni has a Buy rating include Procter & Gamble, which yields 2.4%, and Colgate-Palmolive, at 2.1%. Both are members of the S&P 500 Dividend Aristocrats.
Beverage stocks have struggled lately, partly owing to concerns about higher tariffs after Trump takes office. Coca-Cola, for example, has returned about 10% this year, while PepsiCo is down by about 4%, dividends included.
Still, Falorni says the industry's "dividend health is pretty high" and that "most of the companies' balance sheets are in a really good place."
Coca-Cola, for example, reported that in the quarter that ended on Sept. 30, its net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, was 1.7 times, below its target of two to 2.5 times.
While the stock isn't that cheap -- trading at about 21 times FactSet's consensus 2025 profit estimate of nearly $3 a share -- it's showing respectable growth, says Hightower's Link. "Coke is actually probably one of the better positioned [companies] in terms of organic growth and in volumes," she says.
The stock yields 3.1%.
Link argues that Target is even more undervalued. The retailer reported an earnings miss in November, causing the shares to drop by 22% on Nov. 20.
"The problems are fixable," she says, adding that operating margins need to improve. In the fiscal third quarter, that metric came in at 4.6%, down by about 0.6 percentage point from a year earlier.
But Target has a reliable dividend, most recently $1.12 a share on a quarterly basis, for an annualized yield of 3.3%. The company has raised its dividend for 53 straight years, a reliable shock absorber when the stock runs into trouble and a nice extra when business is stronger.
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December 19, 2024 02:00 ET (07:00 GMT)
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