Top 10 Consumer Staples: Are There Any Worthy Buys? Part 4

|
Includes: ABBV, AEP, AGN, AMGN, CL, COST, CVS, GILD, GOOG, GOOGL, JNJ, KO, LOW, MCD, MO, MRK, MSFT, NEE, NKE, PEP, PG, PM, SBUX, SO, SPY, T, TWX, V, VZ, WBA, WMT, XLK, XLP, XLU, XLV, XLY
by: Canadian Dividend Growth Investor

Summary

The Consumer Staples sector tends to outperform the market over long periods.

In the last 12 months, the sector has outperformed the market.

The top companies in the sector are typically richly valued, which indicates new investments are probably better off placed elsewhere.

That said, the Consumer Staples group still offers some of the safest dividends. Of the top 10 consumer staples, some are better investments than others at current valuations.

With so many stocks to choose from, it can be difficult to filter through them and decide which to buy at any given time.

Earlier this month, I went through a similar process by looking up the top companies from the Utilities ETF (NYSEARCA:XLU) and Technology ETF (NYSEARCA:XLK) in the first article, the Consumer Discretionary ETF (NYSEARCA:XLY) in the second article, and the Heath Care ETF (NYSEARCA:XLV) in the third article.

Specifically, these utilities were covered:

NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK), Southern Co (NYSE:SO), Dominion Resources, Inc. (NYSE:D), and American Electric Power Company Inc (NYSE:AEP).

These technology companies were covered:

AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), Apple Inc.(NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT), Facebook Inc (NASDAQ:FB), Intel Corporation (NASDAQ:INTC), Cisco Systems, Inc. (NASDAQ:CSCO), and Visa Inc (NYSE:V).

These consumer discretionary companies were covered:

Amazon.com, Inc. (NASDAQ:AMZN), Home Depot, Inc. (NYSE:HD), Comcast Corporation (NASDAQ:CMCSA), Walt Disney Company (NYSE:DIS), McDonald's Corporation (NYSE:MCD), Starbucks Corporation (NASDAQ:SBUX), Nike Inc. (NYSE:NKE), Lowe's Companies, Inc. (NYSE:LOW), Priceline Group Inc. (NASDAQ:PCLN), and Time Warner Inc. (NYSE:TWX).

And these health care companies were covered:

Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), UnitedHealth Group Inc (NYSE:UNH), Bristol-Myers Squibb Co (NYSE:BMY), Amgen Inc (NASDAQ:AMGN), Medtronic PLC (NYSE:MDT), Gilead Sciences Inc (NASDAQ:GILD), Allergan plc (NYSE:AGN), and AbbVie Inc (NYSE:ABBV).

In this article, we shall explore the Consumer Staples sector. Particularly, we will look at the valuations of the top 10 holdings (based on index weight) of the Consumer Staples ETF (NYSEARCA:XLP). The ETF yields 2.88% compared to SPDR S&P 500 Trust ETF's (NYSEARCA:SPY) 2%.

In the last 12 months, the XLP has outperformed the SPY. The SPY has risen 3.6%, while the XLP has appreciated 8.5%. Over longer periods, the XLP has tended to be market perform or market outperform while offering a higher yield.

Compare long term returns of the Consumer Staples sector and the market.

Source: Google Finance

Now that the Consumer Staples sector as a whole has outperformed the market recently, it may be time to consider taking some profits or simply do nothing and collect the dividends.

Investors planning to make new investments in this sector should be extra careful about valuation and determine how much they're willing to pay.

Procter & Gamble Co (NYSE:PG)

Procter & Gamble's brand name products include Tide, Crest, Bounty, Pampers, Gillette, Pantene, and more. Its consumer products can be found in the households of more than 180 countries around the globe. Since P&G earns about 60% of its sales outside the U.S., a strong U.S. dollar against other currencies will likely continue to negatively impact the company's profitability.

It's in the midst of reducing its portfolio of brands so that it can be more focused on its efforts. The smaller portfolio will focus on 10 product categories with about 65 brands, including 21 brands with annual sales of $1 billion to $10 billion, and 11 brands with sales of $500 million to $1 billion.

Procter & Gamble fundamental analysis graph Click to enlarge

Because P&G is in the midst of this big transformation, its earnings aren't likely to rise in the short term. As shown in the graph above, P&G's earnings per share (orange line) declined in the last two fiscal years.

So, even though P&G has increased its dividend for the 60th consecutive year, investors shouldn't expect it to give a big dividend hike in the near term. In fact, P&G gave a token dividend raise of 1% in Q2.

At about $86 per share, P&G trades at 22.2x forward earnings with a dividend yield of 3.1% and a forward payout ratio of about 69%. Analysts estimate its EPS to grow 6.2% in the medium term.

The Coca-Cola Co (NYSE:KO)

Coca-Cola's brands include Sprite, Fanta, Dasani, Minute Maid, Powerade, Simply Orange, and more. Like Procter & Gamble, Coca-Cola earns 60% of its sales outside the U.S. and is also affected negatively by a strong U.S. dollar.

Coca-Cola fundamental analysis graph Click to enlarge

Coca-Cola has increased its dividend for 54 consecutive years. Its dividend is 6% higher than a year ago.

At about $43.50 per share, Coca-Cola trades at 21.6x forward earnings with a dividend yield of 3.2% and a forward payout ratio of about 70%. Analysts estimate its EPS to grow 5.4% in the medium term.

Philip Morris International Inc. (NYSE:PM)

Philip Morris is the second-largest tobacco company in the world. Its core brand is Marlboro, which is the number one selling brand in the world. Its volume of 283 billion cigarettes in 2014 outside the U.S. made it bigger than the next two largest brands combined.

Philip Morris also owns other leading international brands, including L&M which is the third most popular brand and sells its products in 180 markets around the world. Like Procter & Gamble and Coca-Cola, a strong U.S. dollar negatively impacts Philip Morris's profitability.

After Philip Morris was split from Altria Group Inc (NYSE:MO) in 2008, Philip Morris has increased its dividend for eight consecutive years; its dividend is 2% higher than a year ago.

At about $99 per share, Philip Morris trades at 22.2x forward earnings with a dividend yield of 4.1% and a payout ratio of about 91%. Analysts estimate its EPS to grow 10.1% in the medium term.

Altria

In the U.S., Altria has leading positions in cigarettes, smokeless tobacco products, and machine-made large cigars with a focus on four premium brands: Marlboro, Black & Mild, Copenhagen, and Skoal.

Altria's operating companies include Philip Morris USA, U.S. Smokeless Tobacco, John Middleton, Nu Mark, Ste. Michelle Wine Estates, and Philip Morris Capital. Altria also has a 27% interest in SABMiller plc​. Altria's equity earnings from this stake have grown from $600 million in 2010 to $1 billion in 2015, a compounded annual growth rate of 10.9%.​

Altria has increased its dividend for 46 consecutive years; its dividend is 8.7% higher than a year ago.

At about $66.50 per share, Altria trades at 21.7x forward earnings with a dividend yield of 3.4% and a payout ratio of about 74%. Analysts estimate its EPS to grow 8.3% in the medium term.

Wal-Mart Stores Inc. (NYSE:WMT)

Wal-Mart is the largest, global retailer. It serves almost 260 million customers every week in 28 countries across more than 11,500 stores and its e-commerce websites. In the fiscal year 2016, Wal-Mart posted net sales of $479 billion.

Wal-Mart has increased its dividend for 43 consecutive years; its dividend is 2% higher than a year ago.

At about $73.80 per share, Wal-Mart trades at 17.3x forward earnings with a dividend yield of 2.7% and a payout ratio of about 47%. Analysts estimate its EPS to grow 4.4% in the medium term.

CVS Health Corp (NYSE:CVS)

CVS is the biggest pharmacy health care provider in the U.S. with a network of more than 68,000 retail pharmacies including more than 9,600 pharmacy store locations. CVS is one of the U.S.'s largest pharmacy benefit managers, which serves more than 75 million plan members.

CVS Health Corp fundamental analysis graph Click to enlarge

CVS has a trend of growing its EPS over time. Further, it has increased its dividend for 13 consecutive years; its dividend is 21.4% higher than a year ago.

At about $97.40 per share, CVS trades at 17.5x earnings with a dividend yield of almost 1.8% and a payout ratio of about 29%. Analysts estimate its EPS to grow 12.6% in the medium term.

PepsiCo, Inc. (NYSE:PEP)

Pepsi's outlook is a bit better than Coca-Cola because Pepsi earns about half of its revenue from snacks other than having a non-alcoholic drinks portfolio. Pepsi's brands include Gatorade, Mountain Dew, Tropicana, Lay's, and Quaker.

Pepsi has increased its dividend for 44 consecutive years. Its dividend is 7.1% higher than a year ago.

At about $108.70 per share, Pepsi trades at 22.8x forward earnings with a dividend yield of 2.8% and a forward payout ratio of about 63%. Analysts estimate its EPS to grow 6.3% in the medium term.

Costco Wholesale Corporation (NASDAQ:COST)

As of June, Costco operates an international chain of 708 membership warehouses of which 70% are located in 43 states in the United States and Puerto Rico. It also has warehouses in Canada, Mexico, the U.K., Japan, Taiwan, Korean, Australia, and Spain.

Costco has increased its dividend for 13 consecutive years. Its dividend is 12.5% higher than a year ago.

At $167.70 per share, Costco trades at 31.6x earnings with a dividend yield of 1.1% and a payout ratio of about 34%. Analysts estimate its EPS to grow 9.5% in the medium term.

Walgreens Boots Alliance Inc (NASDAQ:WBA)

Walgreens is one of the largest retail pharmacies in the U.S. and Europe with 13,100 stores in 11 countries as of August 2015. Walgreens is expanding into South Korea, and the first stores are expected to launch in the first half of 2017.

Walgreens has increased its dividend for 41 consecutive years. Its dividend is 4.2% higher than a year ago.

At about $80.50 per share, Walgreens trades at 18x earnings with a dividend yield of 1.9% and a payout ratio of about 33%. Analysts estimate its EPS to grow 12% in the medium term.

Colgate-Palmolive Company (NYSE:CL)

Colgate's consumer products can be found in more than 200 countries. In fact, 51% of its 2015 net sales were in emerging markets. Its brands fall into the categories of personal care, oral care, home care, and pet nutrition.

Colgate has increased its dividend for 53 consecutive years. Its dividend is 2.6% higher than a year ago.

At about $74.60 per share, Colgate trades at 26.5x earnings with a dividend yield of 2.1% and a payout ratio of about 55%. Analysts estimate its EPS to grow 7.9% in the medium term.

Conclusion

Procter & Gamble, Coca-Cola, and Pepsi trades at relatively expensive multiples compared with their historical trading levels. Although the companies still pay solid dividends at yields of about 3%, investors can probably find better opportunities for total returns in new investments.

For example, Philip Morris and Altria trade at similar multiples to PG, KO, and PEP but offer higher yields with better growth prospects -- albeit not an apple to apple comparison.

CVS benefits from an aging population in the U.S. Further, CVS trades at a reasonable multiple of 17.5, making it one of the better opportunities to explore for total returns in the double-digits if investors don't need immediate income.

Up next

I'm considering discussing the sectors of Financials, REITs, and Industrials in future articles.

Share your thoughts in the comments below

  • Which Consumer Staples are you buying/avoiding today?
  • Which other sectors/companies are you buying/avoiding today?

If you like what you've just read, you can also follow me. Simply click on the "Follow" link at the top of the page to receive an email notification when I publish a new article.

I also run a premium service for my subscribers who get priority attention and gain access to my real-time buys and sales. Feel free to try the service for free for two weeks.

Disclaimer: This article consists of my opinions and is for educational purposes only. Please do your own research and due diligence and consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long AAPL, FB, ABBV, AMGN, GILD, NKE, AND SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.