4 Consumer Staples Dividends For The Long Run

Includes: CPB, GIS, MDLZ, SJM
by: Dividendinvestr

By definition, consumer staples are goods that people buy regardless of the economy's state. Therefore, investing in consumer staples stocks, considered non-cyclical stocks, is a good investment decision for the long-run. Consumer staples stocks are generally low-beta stocks, which means that they trade at lower volatility than the broader market. Moreover, most consumer staples companies pay attractive dividends, which makes them preferred dividend plays among income investors.

We have selected four consumer staples stocks that show a long consistency of earnings and dividends growth and stability. These stocks have an average yield of 3.1% and an average payout ratio of 54%. They represent appealing investment choices at the time the economy is showing some signs of fatigue.

General Mills (NYSE:GIS) is a $25-billion consumer foods business whose popular brands include Yoplait, Colombo, Pillsbury, Green Giant, Old El Paso, Hagen-Dazs, and Cheerios. Over the past five years, the company grew its EPS and dividends at average rates of 8.2% and 11%, respectively. The company's EPS growth is forecast to average 7.4% per year for the next five years. The company has a free cash flow yield of 3.7%, ROE of 24.5%, and ROIC of 11.6%. Its ROIC has been on a rising trend over the past decade at least. The company's margins are likely to be pressured in the near term due to the surge in grains prices amid a severe drought this year. Still, based on the similar trends in the past, it is expected that the company will successfully pass some of the input price increases to final consumers. The company is supporting EPS growth through a restructuring plan, whereby it is cutting 2.4% of its workforce in an effort to cut costs and boost productivity. In late June, General Mills reported quarterly EPS that beat the consensus EPS estimate by a penny on a robust revenue growth of nearly 12% on a year-over-year basis. The company is growing its international sales through acquisitions-in May, it acquired a Brazilian food company Yoki for $875 million. This acquisition will more than double General Mills' Latin America revenues to $1 billion.

General Mills has paid dividends for 114 years. The company is currently paying a dividend yielding 3.4% on a payout ratio of 56%. It pays a dividend yield double that of the 10-Year Treasury bond and well above the yields of its peer group and the S&P 500 index. The stock has favorable valuation as it is trading at a discount to its peer group based on the forward P/Es. The stock is trading at $38.34 a share, up almost 5% over the past 12 months. Fund managers Ric Dillon (Diamond Hill Capital), Phill Gross (Adage Capital Management), and billionaire Steven Cohen are all bullish about the stock.

J. M. Smucker Company (NYSE:SJM) is an $8.7-billion branded food products company selling a variety of products such as coffee, peanut butter, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, and pickles and condiments. The company's EPS and dividends grew at average annual rates of 8.1% and 11% per year over the past five years. Its EPS growth is forecast to average 7.8% annually for the next five years. The company has a free cash flow yield of 2.8%, ROE of 8.7%, and ROIC of 6.7%. A Goldman Sachs analyst recently upgraded the stock of J. M. Smucker Company to 'buy' from 'neutral' citing lower raw coffee prices, down 32% over the past year, which will have a positive effect on the company's margins. The coffee business, under the brand name of Folgers, is the company's largest revenue and profit source.

The company has paid dividends since 1960. Currently, its dividend yields 2.7% on a payout ratio of 51%. J. M. Smucker Company's dividend yield is a full percentage point above that of the 10-Year Treasury and 60 basis points higher than the yield on the S&P 500 index. The stock is currently trading at a discount to its peer group; however, based on the forward P/Es, the stock is trading on par with its food products industry. At $79 a share, the stock is up 4% over the past year. Fund managers John W. Rogers (Ariel Investments) and Bernard Horn (Polaris Capital Management) hold large positions in the stock.

Campbell Soup Co. (NYSE:CPB) is an $11 billion convenience food products company. It produces and sells soups, broth and stocks, pasta and sauces, canned poultry, juices and beverages, beans, cookies, crackers, and bakery products, and frozen foods. The company's EPS and dividends grew at 6.8% and 7.7 per year over the past half decade. Analysts forecast that its EPS will expand at an average annual rate of 4.4% for the next five years. The company has a free cash flow of about 4%, ROE of nearly 64%, and ROIC of 18.2%. The stock has a very low beta of 0.27, which means it is almost 4 times less volatile than the broader market. The stock is less exposed than some of its other peers to surging grains prices. It is also in the second year of a turnaround that some analysts consider fairly successful. However, it should be noted that soup sales, a leading share in Campbell Soup's revenues, have been on a secular decline due to a generational shift, with young consumers less likely to consume soup than the average population and the baby-boom generation. Still, accounting for half the soup market share in the United States, Campbell Soup is trying to reinvent its product offering, introducing new tastes that should appeal to younger generations. This is a longer-term strategy that should be evaluated in the coming years.

The company has paid dividends since 1902. The stock pays a dividend yield of 3.5% on a payout ratio of 50%--the highest yield and the lowest payout ratio among the four featured dividend stocks. Campbell Soup's yield is double that of the 10-Year Treasury bond and 140 points above the yield on the S&P 500 index. The stock appears attractive on valuation. Based on a forward P/E of 13.9, the stock is trading at a small discount to its peer group. At $34.64 a share, the shares are up 11.5% over the past year. They are trading close to a 52-week high. Among fund managers, the stock is popular with billionaires Jim Simons, Israel Englander, and Ken Griffin, all of whom own small stakes in the company.

Kraft Foods (KFT) is a $72 billion producer of packaged food products and beverages. It is one of the largest food companies in the U.S. and the world's second largest food distributor. The company will split into two businesses on October 1: a North American grocery named Kraft Foods Group and a company focusing on sales of global snacks products called Mondelez International. The company's board has approved the spin-off through a pro rata dividend to its shareholders of record as of the close of business on September 19. Each shareholder will receive one share of Kraft Foods Group common stock for every three shares of Kraft Foods common stock. The spin-off is expected to lead to reduced complexity, better resource allocation, margin expansion, and improved organic growth. The company's EPS and dividends grew at average annual rates of 3.1% and 3.0% over the past five years. Its EPS growth is forecast to accelerate to 11% per year for the next five years. The stock has a free cash flow yield of 2.1%, ROE of 9.6%, and ROIC of 5.3%.

The company has paid dividends since 2001. It currently pays a yield of 2.8% on a payout ratio of 58%. While slightly below the average yield of its peer group, Kraft Food's dividend yield is higher than those of the 10-Year Treasury and the S&P 500 index. Based on its forward P/E, the stock is trading at a slight premium to its respective industry; however, it is trading at a discount to its own five-year average P/E. Currently, the shares are changing hands at $40.70 a share, up 17.4% over the past year and less than a buck away from their 52-week high. Warren Buffett had nearly $3 billion invested in the company's stock at the end of the first quarter. Activist investor Bill Ackman sold out of his entire stake in the stock. He previously owned 15 million shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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