The consumer staples sector has been hated by investors over the past year or two. There are several headwinds that appear to have depressed the share prices for many quality consumer staples with reliable dividend payments. Some of these headwinds include slowing growth, threats of product obsolescence, rising interest rate and a general decrease in investor demand for these securities.
I believe that investors are overly conservative in their expectations for consumer staples today, which is why the valuations are overshooting on the downside. This is in stark contrast to the situation in 2016, when valuations were overshooting to the upside.
The market is a manic-depressive entity. Back in 2016, consumer staple stocks were red-hot and selling at high valuations relative to their growth prospects. Investors were bidding them up and happy to pay 25 – 30 times forward earnings. For example, back in 2016, General Mills was expected to earn roughly $3/share and sold as high as $69/share for a cool 23 times forward earnings.
Right now, General Mills (GIS) is still expected to earn roughly $3/share, but is selling for $42/share, for a cheap 14 times forward earnings. The business prospects for the entity were equally grim in 2016 and in 2018. The only thing that changed is the investor perception of the entity. This rosy perception triggered investors to be excited and willing to overpay dearly at 23 times earnings in 2016 for a business that was not growing. Once the perception became grimmer, investors were unwilling to pay even 14 times forward earnings in 2018 for the same entity, with the same prospects. The problem with General Mills today is that earnings per share have not grown since 2011.
Therefore future dividend growth will be limited and the return will be dependent on the dividend yield plus a potential expansion of the P/E multiple. This is why I see it as a hold.
In general, I try to buy into companies with growing earnings and dividends, and hold on to them for years, rather than try and “forecast” whether the P/E multiple will shrink or expand. However, if management turns the ship around and ekes out some growth in earnings and revenues, shareholders will be rewarded well.
After performing some reviews, I came up with a list of companies in the consumer staples sector, which are attractively priced today. I believe that each one of these companies has sustainable dividends. Each one of those companies is also growing earnings per share, which will be helpful for future dividend growth and to increase the intrinsic value of our share investments over time. All of those companies are priced below 20 times forward earnings.
Kimberly-Clark Corporation (KMB) manufactures and markets personal care, consumer tissue, and professional products worldwide. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional. Kimberly-Clark is a dividend aristocrat with a 46 year track record of annual dividend increases. Over the past decade, it has managed to increase its dividend at an annual rate of 6.70%/year. Currently, the stock is attractively valued at 14.60 times forward earnings and yields 3.80%. Check my analysis of Kimberly-Clark for more information about the company.
Altria Group, Inc. (MO) manufactures and sells cigarettes, smokeless products, and wine in the United States. Altria is a dividend champion, which has managed to reward shareholders with a raise for 49 years in a row. The ten year dividend growth is 11.30%/year. Currently, the stock is attractively valued at 14 times forward earnings and yields 5.10%. Check my analysis of Altria for more information about the company.
Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. With a 42 year track record of dividend increases under its belt, Walgreens Boots Alliance has a well-deserved membership in the dividend aristocrat’s index. Over the past decade, it has managed to boost its distributions at a rate of 16.20%/year. Currently, the stock is attractively valued at 10.60 times forward earnings and yields 2.50%. I need to refresh my analysis of the company. Please stay tuned.
The J. M. Smucker Company (SJM) manufactures and markets branded food and beverage products worldwide. It operates through U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Foodservice segments. This dividend achiever has raised dividends for 20 years in a row. Over the past decade, it has managed to increase them by 10%/year. Currently, the stock is attractively valued at 13.10 times forward earnings and yields 2.70%. Check my analysis of J.M. Smucker for more information about the company.
All of these companies have managed to grow earnings per share over the past decade. They will likely continue growing earnings and dividend per share for the foreseeable future. Given the low valuation multiples, I believe that those future dividend streams are selling at a bargain price. That doesn’t mean of course that the valuations cannot go down from here. This is why I tend to build my positions in companies slowly and over time through dollar cost averaging. That way, I diversify between a number of companies across time.
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