3 Stocks for Uncertain Times

On Procter and Gamble’s (PG) most recent conference call, CEO AG Lafley made a simple yet powerful comment on the recession-proof nature of their products:

Virtually everything we sell is not discretionary…you have to go to the bathroom. You have to get up in the morning and brush your teeth. You’ve got to shower. You’ve got to shave ... you’ve got to wash your clothes.

Aside from personal care products, this argument can be extended to variety of everyday products. People are going to smoke Marlboros no matter what the economy is doing (perhaps even more so in the down times). People also have to eat, and supermarket staples will continue to hit the shopping carts. Macaroni and Cheese anyone?

We’ll look at three stocks that should hold up in the current market uncertainty. Note that all three have stable household-name brand names and pay a solid dividend - another safety measure during uncertainty.

Procter and Gamble (PG)

With annual revenues of over $80 billion, P&G is the world leader in personal products. Brand names in their portfolio include Tide, Charmin, Crest and Gillette, and they own 23 “billion-dollar brands”.

Commodity costs have been increasing, but the power of these brands have allowed them to pass these costs onto the consumer: sales for the most recent quarter were up 9 percent and earnings were up 11 percent, in line with their historical growth rates, and their operating margins have steadily improved over the last 10 years. Currently trading near the bottom of its historical P/E, Price to Book, Price to Sales and Price to Cash Flow ratios, it looks very compelling in it’s current trading range of the mid to low 60's; even more so considering it's the industry leader with strong pricing power, and a long history of brand innovation.

The stock is currently yielding 2.3 percent, and amazingly, has not missed a dividend payment since 1891.

Kraft (KFT)

Remember surviving off Macaroni and Cheese in college? Along with that cupboard staple, Kraft’s brands include Ritz, Planters, Jell-O, Velveeta and Oscar Mayer.

Spun off from Altria (MO) last year, Kraft is currently in a major cost-cutting phase and parceling off certain brands like Post Cereals.

Warren Buffet sees value, and has been building a position in KFT; he currently owns about 10 percent of the company. Some investors see these brands as tired and lacking growth potential. With KFT being a more nimble unit outside the Altria umbrella, they are addressing these concerns with plans to introduce 80 new products next year. The stock is currently yielding a tasty 3.7 percent.

Altria (MO)

Being the market leader in a product people are addicted to is a good thing - in good times and bad. Famous for its Marlboro brand, Altria’s recently spun-off their faster growing international business as Phillip Morris International (PM). While Altria’s top line growth has slowed down to roughly 3 percent, they still managed to grow earnings by 12 percent.

How? Through aggressive cost cutting, which included closing their New York headquarters and other restructuring initiatives which they predict will save $250 million annually.

The real kicker with Altria, though, is their 5.6 percent dividend yield, currently about one percent higher than 30-year Treasury bond yield. Altria has never lowered the dividend, and this will have recession-nervous investors sleeping better at night.

As highlighted by Jeremy Siegel in this article on Bert Bernanke’s favorite stock, MO has crushed the returns of the S&P 500 since the formation of the index in 1957 - largely due to the fat dividend and consistent dividend hikes.

Disclosure: none

 

Comments

[skwestorange:]

While the observation that people have to have to do this or that for theri basic necessities is generally true, it does not automatically mean they have to buy the premuim priced products of PG when they can ill afford that luxury. They do have alternative store brands and they will buy them, meaning less sales or margin compression to PG and the likes. Obviously this does not mean PG and their brothern are not safe, but it does mean they too will take ahit as the broad market declines.

2008 Jun 26 09:50 AM

[jackooo:]

Great simplistic article.
I have owned Kraft and MO forever. Made more in dividends and the hike in dividends over the years than I have in buying & selling shares. Give me the sure dividend any time.

2008 Jun 26 11:55 AM

[E.D. Hart:]

Buffet has lost money on Kraft so far. People are underestimating how much people will switch to generics as costs rise, and increases in costs compress margins--a big problems for Kraft, but not nearly so much for PG, and hardly true at all for MO. I would not own Kraft due to this margin compression and p/e contraction.

2008 Jun 26 04:32 PM

[RonB:]

The writer is on point with Kraft. It is an excellent purchase opportunity at the currrent share price. Input cost problems are temporary, as a substantial portion can be passed on through pricing. There is ample cash flow for stock buybacks, lots of room for financial engineering, and an outdated product line that the recently appointed CEO is aggressively working to improve. The Post splitoff is a good example, and will result in a lower share count. Many people are seeing only short-term problems, but others, like Buffett, see that long-term opportunities are extensive. The company's distribution channels are a key factor.

Kraft is a substantial weighting in my personal and client portfolios.

Ron Beasley
Investment Advisor
rwbi.net

2008 Jul 22 01:42 PM

[amato:]

It is good article, you have truth. I agree with you and I expect good earnings because revenues increasy and cost problem is really temporary and they make everything cut it.


On Jul 22 01:42 PM RonB wrote:

> The writer is on point with Kraft. It is an excellent purchase opportunity
> at the currrent share price. Input cost problems are temporary, as
> a substantial portion can be passed on through pricing. There is
> ample cash flow for stock buybacks, lots of room for financial engineering,
> and an outdated product line that the recently appointed CEO is aggressively
> working to improve. The Post splitoff is a good example, and will
> result in a lower share count. Many people are seeing only short-term
> problems, but others, like Buffett, see that long-term opportunities
> are extensive. The company's distribution channels are a key factor.

>
>
> Kraft is a substantial weighting in my personal and client portfolios.

>
>
> Ron Beasley
> Investment Advisor
> rwbi.net

2008 Jul 24 04:01 PM