Consumer Staples Stocks Seem Priced For Perfection

Summary

• P&G, Clorox, and Colgate-Palmolive hold valuation multiples at significant premiums to the S&P 500 and the consumer staples sector.
• This is despite disappointing underlying earnings and dividend growth this year, and very modest future growth expectations.
• Investors chasing their yields should wait for a 10%-15% pullback before buying.

Investors often flock to the consumer staples sector for stability. It's true that the dividend-paying consumer stocks like Procter & Gamble (PG), Clorox (CLX), and Colgate-Palmolive (CL) generate steady profits and provide investors with a consistent income stream.

However, it's also true that even great businesses, which P&G, Clorox, and Colgate-Palmolive certainly are, can amount to poor investments if an investor pays too high a price for their earnings. That seems to be the proposition for investors going forward, as these two stocks carry very lofty valuations that exceed the valuation of the S&P 500. This is especially concerning for these three stocks, because their earnings growth has not justified such premium multiples.

Going forward, investors should expect fairly modest returns from this group, based on their rich valuations today. For those buying in at these levels, expect to receive sub-3% dividend yields, but not a great deal more than that.

Valuations sending up red flags

The S&P 500 Index trades for 18 times its trailing 12-month earnings per share, and 16 times forward earnings estimates, according to data from Standard & Poor's. This means the least richly valued of the three, Clorox, is 16% more expensive on a trailing P/E basis. The most expensive, Colgate-Palmolive, is 50% more expensive than the S&P 500.

Here is how the consumer staples group trades in comparison.

	TTM P/E	Forward P/E	Dividend Yield
Procter & Gamble	22	17	3.2%
Clorox	21	18	3.4%
Colgate-Palmolive	27	20	2.3%

Click to enlarge

In addition, these three stocks are more highly valued than their own peer group. Standard & Poor's states the consumer sector is valued at 19.5 trailing 12-month EPS. This would place the cheapest of these three, Clorox, at a nearly 8% premium to the broader sector.

Moreover, each of them are trading well

Analyst’s Disclosure:The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.