Recently there has been a tremendous amount of fear abound due to the significant volatility in the markets. The 10-year Treasury is currently yielding just over 2%. With these facts in mind, many analysts have been recommending high-quality income stocks that reside in defensive industries. One of these areas is the consumer staples sectors.
Consumer staples represent a wide range of industries that manufacture and sell food/beverages, tobacco, prescription drugs and household products. I want to analyze these 5 conglomerates to see if any of them have attractive valuations that encourage investment.
The major financial measurements that I will be looking at:
Debt to Equity: The debt-to-equity ratio is a leverage ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It reveals how a company has financed its assets. A low debt-to-equity ratio indicates lower risk because shareholders have claims on a larger portion of the company's assets.
Dividend Yield: The dividend yield is the sum of a company's annual dividends per share divided by the current price per share.
FCF Payout Ratio: This ratio is the company’s current dividend per share (ttm) divided by its free cash flow per share. It gives the investor a clearer picture of the company’s ability to cover its dividend than the more traditional payout ratio. This is because free cash flow is much a harder metric for a company to manipulate, as opposed to net income. I look for a ratio in the neighborhood of 70% or lower.
Price to Owner's Earnings: This ratio looks at the relationship between the share price of the company and the free cash flow per share. I personally think that an attractive multiple is under 20.
Consecutive Years Increasing Dividends: One of the best ways to see how strong a dividend that a company has is to look at how consistently it issues and increase its payouts.
5-Year Average Annual Growth Rate: This is the average speed at which the dividend has grown during the previous 5 years. It helps us get an idea about how important the dividend is in the eyes of the company’s management.
The Five Major Consumer Staples:
Procter & Gamble (PG)
Overview: The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company offers beauty products, such as cosmetics, female antiperspirant and deodorant, female personal cleansing, female shave care, hair care, hair color, hair styling, pharmacy channel, prestige products, salon professional, and skin care products.
- Yield = 3.30%
- FCF per Share = 2.5818
- FCF Payout Ratio = 81.3%
- Years Increasing Dividends = 55
- Price to Earnings Ratios = 16.34 – 13.99
- Price-to-Owner's Earnings = 24.86
- 5-Year Average Annual Growth Rate = 11.6%
- Debt-to-Equity Ratio = 47.08
Analysis: One of the most attractive aspects of PG is its stellar reputation of being able to increase its dividends year after year. It has a high price to owner’s earnings ratio of 24.86 which makes it too expensive for me at this price.
Overview: The Coca-Cola Company manufactures, distributes, and markets non-alcoholic beverages worldwide.
- Yield = 2.90%
- FCF per Share = 1.513
- FCF Payout Ratio = 124%
- Years Increasing Dividends = 49
- Price-to-Owner's Earnings = 43.516
- Price to Earnings Ratios = 12.27 – 15.53
- 5-Year Average Annual Growth Rate = 9.5%
- Debt-to-Equity Ratio = 74.06
Analysis: Coca-Cola is the leader in the non-alcoholic beverage industry. The worldwide exposure of this brand is incredible. It is not a far stretch to say that you could find a bottle of Coke in a desert in Africa or in the frozen tundra of Antarctica. However the numbers show that this company is quite expensive right now. The price to owner’s earnings ratio of the company is 43.516. This is in far excess of the multiple of 20 or under that I normally look for. Many investors will be drawn in by the low P/E ratio that they see in KO. I must point out that this is due to a one-time earnings boost that occurred because of Coke’s purchase of its major bottling corporation.
Overview: Altria Group, Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. It offers cigarettes under the Marlboro, Virginia Slims, Parliament, Benson & Hedges, Basic, and L&M brands.
- Yield = 6.20%
- FCF per Share = 2.156
- FCF Payout Ratio = 76.1%
- Years Increasing Dividends = 43
- Price to Earnings Ratios = 16.54 - 12.39
- Price-to-Owner's Earnings = 12.59
- 5-Year Average Annual Growth Rate = 14.8%
- Debt-to-Equity Ratio = 293.23
Analysis: Altria is one of my favorite high-yielding dividend champions. I also like the fact that it resides in a proven defensive industry. It looks inexpensive as well with a low price-to-owner’s earnings ratio of 13.27. Some investors might be scared off by the large amount of leverage that they see on its balance sheet. MO saw fit to increase its dividend by 10% this year. This should not come as a surprise for anyone who follows Altria as it has been issuing and increasing its dividends for 43 straight years.
CVS Caremark Corporation (CVS)
Overview: CVS Caremark Corporation operates as a pharmacy services company in the United States.
- Yield = 1.50%
- FCF per Share = 3.1925
- FCF Payout Ratio = 15.6%%
- Years Increasing Dividends = 8
- Price-to-Owner's Earnings = 10.62
- Price to Earnings Ratios = 13.78 – 10.63
- 5-Year Average Annual Growth Rate = 19.1%%
- Debt-to-Equity Ratio = 28.96
Analysis: CVS has the lowest yield of any company on the list at a minuscule 1.50%. It also has the least number of years increasing dividends at a still impressive 8 consecutive years. The current valuation of the company looks very interesting. Their P/E ratios are very low at 13.78 (ttm) and a forward ratio is 10.63. Also it has the lowest price to owner’s earnings ratio at 10.62 well below the multiple of 20 that I normally look for.
Overview: Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide.
- Yield = 2.60%
- FCF per Share = 4.1392
- FCF Payout Ratio = 55%
- Years Increasing Dividends = 48
- Price-to-Owner's Earnings = 21.63
- Price to Earnings Ratios = 18.58 – 16.34
- 5-Year Average Annual Growth Rate = 12.8%
- Debt-to-Equity Ratio = 159.45
Analysis: Colgate-Palmolive is a worldwide leader in the toothpaste and mouthwash markets. It should be plain to see why this is a very recession-resistant company. CL’s revenues are also widely diversified. More than half of the company’s sales are coming out of the emerging markets. It has a price to owners earnings multiple of 21.63 which is above the 20 multiple that I like. I like the makeup of this company and their fantastic history of paying back their investors. Any pullback in the share price would drop the multiple into the range that I find attractive for investment.