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Consumer stocks have underperformed the broad market in 2013; in the second half of the year, consumer stocks' multiples came under pressure as investors opted for sector rotation and moved to more cyclical sectors. Also, rising interest rates negatively affected the sector performance in 2H2013. I believe the headwinds faced in 2013 by the consumer sector are likely to prevail in the ongoing year. Also, I believe 2014 will be a year of stock picking, as the consumer sector might underperform the market. Click here to read my recent article on the consumer sector.

Given the tough conditions for the sector, I am bullish on three consumer stocks for 2014. All three offer solid dividends and attractive growth rates. The following are three stocks I am bullish on for the ongoing year, General Mills (NYSE:GIS), Kraft Foods (NASDAQ:KRFT) and Philip Morris (NYSE:PM).

General Mills

GIS is among the leading food companies of the U.S., with significant exposure to international markets. The company has delivered satisfactory financial performance in recent years and is expected to deliver healthy performance in coming years. GIS has been making efforts to expand its international market exposure, which will offset the weakness in the U.S. market and provide earnings growth. The company has been making strategic acquisitions to expand its international exposure. The following table shows the increase in GIS' international sales in recent quarters.

3QFY2013

4QFY2013

1QFY2014

2QFY2014

% Increase in International Sales

24%

26%

22%

3.5%

Source: Quarterly Company Releases

Other than expanding its international exposure, the company has been taking aggressive measures towards product innovation, which will provide growth for its top and bottom lines. In FY2014, GIS plans to launch 50 new products. Analysts are anticipating a healthy next five years growth rate of 8% for GIS. The following table shows the EPS forecast for GIS from 2014-2016.

FY 2014

FY 2015

FY 2016

FY 2017

EPS Est.

$2.87

$3.09

$3.3

$3.64

Source: Nasdaq.com

The company offers a decent yield of 3.1%. Dividends offered by the company are safe and sustainable, as they are backed by solid cash flows. Also, the company has a low payout ratio of 53%. The following table shows the healthy dividend and cash flow relationship.

Source: Company Reports and Calculations

(Note: 2014 numbers are based on estimates. All numbers are in $ billions).

Kraft Foods

KRFT is another leading U.S. food company, operating in a competitive and mature North American food and beverage industry. The company is likely to increase its sales in line with the industry average of 1.5%-3%. KRFT is working to expand its margins, by 250bps to 350bps, by improving its cost structure and enhancing productivity; KRFT is taking measures to redesign the supply chain. KRFT has lower advertisement spending in comparison to its peers, which it could increase to build consumer loyalty and expand its sales volume. Currently, KRFT has an advertisement-to-sales ratio of less than 4%, lower than its competitors' average of 6%. Analysts are anticipating a healthy next five years growth rate of 6.5% for the company. The following table shows the EPS estimates for KRFT from 2014-2016.

2014

2015

2016

EPS Est.

$3.18

$3.44

$3.72

Source: Nasdaq.com

Moreover, the company offers a healthy dividend yield of 3.9%. Dividends offered by the company are sustainable, as they are backed by its healthy free cash flow yield of 7.3%. Also, the healthy dividend yield of the company limits the downside of the stock price. I believe the stock remains a good investment option for dividend-seeking investors, and the company's productivity initiatives are likely to portend well for the future earnings growth.

Philip Morris

Lately, sales volume decline has been accelerating for the tobacco industry due to strict regulations and a shift in consumer preference towards healthy alternates. A greater-than-expected sales volume decline in recent quarters and the adverse impact of foreign currency took a toll of PM's stock price. In the second half of 2013, the stock price of PM dropped by more than 6%. The recent pullback offers a good opportunity for investors to buy the stock. Also, currently the stock offers a high dividend yield of 4.5%. Dividends offered by the company are safe as they are backed by solid cash flows, as shown below in the chart.

Source: Company Reports and Calculations

(Note: 2014 numbers are based on estimates. All numbers are in $ billions).

I believe the stock remains a good option for long term investors. The company recently announced that it would accelerate its Next Generation Product initiatives, which I believe will drive its future earnings growth and help in offsetting the sales volume decline of traditional cigarettes. The company plans to initiate Next Generation Products Platform 1 in 2015; earlier the company had plans to launch Platform 1 in 2016-2017. Other than offering attractive dividends, the company's earnings are expected to grow at 10%-12% per annum, on a constant currency basis. The following are analyst EPS estimates for the company from 2014-2016.

2014

2015

2016

EPS Est.

$5.54

$6.02

$6.59

Source: Nasdaq.com

Conclusion

I believe 2014 will be a tough year for consumer food companies as interest rates are on the rise and investors will prefer more risky sectors. I remain bullish on the abovementioned consumer companies. The companies have delivered healthy performances in the past and remain on track to post a decent performance in coming years. All three companies offer healthy and safe dividends, and are expected to experience attractive growth rates.

Source: 3 Stocks Offering High Dividend Yields And Robust Growth Rates