Warren Buffett once said "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." Consumer goods stocks often abide by this rule of thumb as they are less likely to be as volatile as technology firms, and they can often withstand swings in commodity prices.
The Dow Jones Consumer Sector Index (IYK) is up 14% year-to-date with a low beta of 0.61 versus the S&P 500 (SPX), which is up 10% year-to-date (beta of 1). For further comparison, the Dow Jones U.S. Technology Sector Index Fund (IYW) is up 2.9%, 0.97 beta. This makes the consumer sector seem more attractive versus the broader market.
Of course, if the market was shut down for ten years, investors would like a bit of reward for their patience. With these words of wisdom in mind we created a list of consumer good stocks with a strong dividend yield and profitability trends.
Building the List
To create the list below we started with consumer goods stocks offering a dividend between 2% and 5%. This allowed us to focus on companies with a strong credit profile.
We further analyzed our list of companies for strong profitability by performing DuPont analysis. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components. If the ROE is unsatisfactory, the DuPont analysis helps target the part of the business that is underperforming. Learn more about the equation here.
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
Our final list consisted of 3 stocks.
Do you think these dividend stocks are attractive? Use this as a starting point for your own analysis. We also list some other data that may be of value to current and potential investors.
1. Dr Pepper Snapple Group, Inc. (DPS): Engages in the manufacture and distribution of non-alcoholic beverages in the United States, Canada, and Mexico.
- Market cap at $9.52B, most recent closing price at $46.67.
- MRQ net profit margin at 11.46% vs. 11.36% y/y. MRQ sales/assets at 0.166 vs. 0.157 y/y. MRQ assets/equity at 3.916 vs. 4.102 y/y.
- Dividend yield at 3.3%.
- Investors should consider other factors in the company's growth. DPS has a lower than average projected earnings growth rate over the next 5 years (5.85%). This is significantly below the analyst projections for Coca-Cola FEMSA S.A.B de C.V. (projected EPS growth over next 5 years at 13.51%) and The Coca-Cola Company (projected EPS growth over next 5 years at 8.95%). Both offer yields above 1%.
2. Neenah Paper, Inc. (NP): Engages in the production and sale of fine papers and technical products worldwide.
- Market cap at $477.56M, most recent closing price at $29.96.
- MRQ net profit margin at 4.41% vs. 3.83% y/y. MRQ sales/assets at 0.34 vs. 0.304 y/y. MRQ assets/equity at 2.979 vs. 3.09 y/y.
- Dividend yield at 2%.
- When comparing valuation ratios to industry averages, Neenah Paper looks expensive. The stock's Price / Free Cash Flow ratio stands at 38.95, much higher than Domtar Corporation (P/FCF ratio at 12.62) and Sappi Limited (P/FCF ratio at 4.18).
3. V.F. Corporation (VFC): Designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe.
- Market cap at $18.38B, most recent closing price at $165.61.
- MRQ net profit margin at 11.02% vs. 8.84% y/y. MRQ sales/assets at 0.315 vs. 0.312 y/y. MRQ assets/equity at 1.879 vs. 2.058 y/y.
- Dividend yield at 2.1%.
- The company's earnings growth looks weak, with EPS growing by 21.61% over the last year. This is considerably weaker than competitors like PVH Corp. (EPS growth over the last year at 55.33%) and Lululemon Athletica (EPS growth over the last year at 49.59%).
*Profitability data sourced from Finviz, all other data sourced from Finviz.