Toothpaste. Toilet paper. Soap. Cereal.
These products aren't nearly as sexy as smartphones or social
networks. But for the past few years, thestocks behind the
companies that make and sell the boring items we consume every
day have run like a scalded dog.
Since the post-panicmarket lows of early 2009, the
Consumer Staples SelectSPDR (
has risen 140%. Not including dividends, that's an average annual
return of 36%. Throw those in, and you get an annual total return
north of 40%. Not too shabby. (Coincidentally, the return on the
S&P 500index for the same interval is about the same.)
How High Can They Go?
As investors have tiptoed back intoequities , they've gravitated
toward stocks of staid consumer goods manufacturers.
These huge companies might not growearnings at lightning-fast
rates. However, the well-run companies in this sector deliver
consistent, predictable earnings and have steadily grown their
While thestock market has rallied, cautiouslybullish investors
have bid up the prices of these perceived "safe" stocks. Look at
the one-year returns for some of the most widely held names in
-- Peddling everything from shampoo to iced tea, this Dutch
behemoth has gained more than 25%.
Campbell Soup Co. (
-- Soup is not only good food, but it's profitable, too.Shares
are up nearly 44%.
-- Fresh breath, healthy gums and returns of more than 25%.
-- While paper manufacturers are often categorized as acyclical
industry , Kimberly-Clark's core portfolio consists of
necessities such as toilet paper and disposable diapers. That's
translated into a 32%-plus return.
With an average return of 31%, this grocery basket of stocks
handily beat the S&P 500's 27% during the pastyear . It would
be safe to say these names, like many of their peers, look a bit
stretched out from a valuation standpoint. But if you're
searching for defensive stocks in consumer staples to add to your
portfolio, there are a few that seem more reasonably priced
compared with the rest of the bunch.
Great Brands, Great Prices
Again, it pays to be cautious when puttingmoney to work in a
lofty market. These names are a good starting point.
B&G Foods (BGS)
-- Want a little of Emeril Lagasse's "Bam!" in your portfolio?
Then check out B&G. With an impressive $1.6 billionmarket cap
, this company has quietly grown itself into a major
The company has grown its product portfolio -- which includes
Cream of Wheat, Ortega, Trappey's and Mrs. Dash -- by acquiring
smaller yet well-known brands from bigger companies that are no
longer able to manage those brands profitably. B&G is
well-positioned to breathe life into those brands through
innovative and strategic marketing.
B&G's shares trade around $30 andyield 3.7%. More impressive
is that the company's year-over-year growth inearnings per share
(EPS) was more than 15%. In comparison, ketchup giant
, which was acquired byWarren Buffett 's
Berkshire Hathaway (NYSE: BRK-A)
, actually saw year-over-yearEPS growth decline by more than 6%.
Procter & Gamble (PG)
-- This Cincinnati-based behemoth is thegold standard in consumer
staples stocks. Look under your sink or in your laundry room or
medicine cabinet, and odds are you've given P&G some money.
Crest, Pampers, Charmin, Tide, Head & Shoulders, and Oil of
Olay are some of its stalwart brands.
One of the main reasons to hold P&G shares is the growing
middle class inemerging markets . As these consumers evolve in
emerging economies, more disposableincome will go toward personal
care and hygiene products. The company is well positioned to take
advantage of this, and no one markets better than P&G.
Anotherfactor is P&G's habit of divesting itself of valuable
yet unprofitable brands. Notablesales include Pringles potato
crisps, Folgers coffee and Jif peanut butter. The company's food
brands are gone, giving P&G the ability to focus on its core
Shares trade around $80 and yield 3%. The average
consumer-staplesdividend yield of representative S&P 500
stocks is around 2.7%, so P&G represents an 11% pickup in
ConAgra Foods (CAG)
- With a portfolio of popular food brands such as Hunt's, Chef
Boyardee, Healthy Choice and Orville Redenbacher, ConAgra also
adds investor value with its food service and industrial
business, which provide specialty potatoes, milled grains,
dehydrated vegetables and seasoning.
Once a perennialtakeover candidate, the company squashed
thatspeculation by acquiring Ralcorp Holdings late last year.
This allowed ConAgra to remain independent and add scale to its
business, thanks to Ralcorp's title as the nation's largest
private-label (store brand) food company.
Shares trade at around $36.50 and yield 2.8%. ConAgra's forward
price-to-earnings (P/E ) ratio is about 16. In comparison,
Campbell Soup has a forward P/E of close to 19, making ConAgra a
15% discount on a P/Ebasis .
Risks to consider:
While these names seem tooffer more value than their peers,
keep in mind that once the consumer staples sector begins to
correct, all of that sector's stocks will be affected. Luckily,
the average dividend yield for these three stocks is 3.26% versus
an average yield of 2.7% for S&P 500 consumer staples stocks,
a difference of 56basis points . All consumer-staple companies,
especially food manufacturers, face input cost risk in an
inflationary environment; at the moment,commodity price inflation
appears relatively tame.
Action to take -->
These stocks carry an average dividend yield of 3.6% and forward
P/E of 18. If each company can maintain its current execution,
the collective forward P/E could expand to 22. While this sounds
expensive relative to the S&P 500's forward P/E of 14, the
average forward P/E on consumer staples stocks for the past 20
years has been 21. Amultiple of 22 would be within the normal
range. This would translate into 12-month price targets of $98
for Procter & Gamble, $48 for ConAgra, and $34 for B&G
Foods. Factoring in dividends, that's a 12-month average return
of 26%. Not bad for a tired-looking sector.