With all the crazy uncertainty in the political environment and the marketplace, it's not that difficult to argue that this is a good time to reconsider every single stock in your portfolio and decide where to go from here. I've read arguments running the full gambit from sell everything now to avoid the coming financial apocalypse to the familiar GW line "stay the course." In my own personal opinion, the best course clearly lies somewhere between the two, and I will likely take action which returns my portfolio to some of the basic principles of retirement investing.
Some of the most stable stocks for those with a long-term horizon can be called "necessity stocks." That is, companies that sell products or provide services needed by everyone. Food, energy, utilities, consumer products, and transportation could all be examples. In this article, I will highlight some stocks related to food and beverages that are capable of providing positive movement in a conservative portfolio regardless of future fiscal policy and any impending fiscal cliff.
First of all, everyone needs to eat -- this might seem to be an oversimplification of the matter, but it is true. There are a number of ways to approach this segment, ranging from food producers such as farms or ranches, food processing companies, grocery stores, or even restaurants. Now in the interest of going back to the basics, I am going to look for solid companies with a history of stability and dividends higher than the S&P 500 average dividend payer which yields 2.65%. I will also look for those that tend to be less volatile than the average as these are uncertain times.
Cal-Maine Foods (CALM)
Cal-Maine produces shell eggs in the United States, and during the most recent fiscal year sold over 821 million eggs in 29 states. The company's primary customers are national and regional grocery chains and makers of other egg products. The company additionally serves the specialty egg segment with products such as organic and cage free eggs.
The company has grown significantly in recent years as evidenced by its acquisitions of additional facilities previously owned by Pilgrim's Pride (PPC) and Zephyr. Much of this growth was financed with debt, and yet the three year trend has been a decrease in total debt with a corresponding increase in income, cash on hand, and total assets. Cal-Maine does pay a dividend, but investors should note that it varies widely from quarter to quarter as the company dividend policy is to pay out one third of earnings. This could make an annualized dividend inaccurate if it is based upon the most recent quarter only. For the past year, the yield equates to almost 3.1%.
Note that the stock is trading near the 52-week high, and with estimated earnings for next year at $3.04, the forward P/E could come back more in line with what we would expect. Regardless, management seems to be doing a nice job of using the profits to responsibly grow the business, increase market share, increase cash, and reduce debt.
H.J. Heinz Company (HNZ)
H.J Heinz markets and sells a wide range of condiments and food products on a global basis. Although likely most famous for its ketchup, this company does produce other products such as frozen foods, soups, and pasta.
With a TTM P/E of just under 19, this company is valued reasonably. It is trading at the upper end of it's 3-year range, but we should note that EPS is forecast to increase incrementally for at least the next four years to the $4.50 range in fiscal year 2016. Looking that far out may be difficult in this unknown environment, but it is a fairly safe bet that Heinz will still be selling condiments during the next Presidential election.
The trends show a steady increase in revenue, net income, and cash on hand. The decrease in total assets is likely due in part to the divestiture of several factories and the streamlining of some global operations as discussed in the annual report.
The stock currently yields a 3.6% dividend, and the company has a very good track record of increasing the dividend over time. H.J. Heinz did not cut or suspend its dividend during the 2008 downturn, instead rewarding the faithful by continuing to distribute the same steady quarterly payments. If dividend growth over time is your thing, at least consider this stock.
McDonald's Corporation (MCD)
Would you like to supersize that? McDonald's needs no introduction as the global fast food heavyweight. The company has continually updated its menu and offerings to reflect changes in consumer tastes and preferences, shifting focus away from the unhealthy fat-laden menu of yesterday in favor of healthier choices. You can still order a Double Quarter Pounder with Cheese if you like, or perhaps a fruit and yogurt parfait.
McDonald's continues to increase the bottom line as net income and revenue show improving trends. In fact, an 18.7% increase in revenue translated to a 20.9% increase in net income. Cash on hand increased by 30% while debt also increased, but only by 18.1%.
With a P/E of around 16.5, McDonald's is priced fairly attractively considering the dividend and recent pullback in price. The stock is down almost 15% since January 2012, but more recently dropped 6.3% since the middle of October. The dividend of over 3.5% is clearly safe, and this company does have a strong record of increases to include the recent 10% increase. With the estimates of continually growing earnings, this stock should be considered a safe play.
Another global heavyweight in the consumer food and beverages, Coke has worldwide exposure and an impressive $14 billion dollars in cash and short-term investments That translates to a little over $3 per share or about an 8.5% discount. Coke is trading near the upper end of the three-year range, but it peaked at the end of this past July, dropping about 7.5% since then.
Coke has increased revenues 50% since 2009, with the corresponding increases in income, cash on hand, and total assets. The only spot which could draw negative attention is the 140% increase in total debt, but many companies are taking advantage of the historically low interest rates to finance growth or other efforts. Coke's P/E of 19.2 is in line with what could be expected, but the yield of 2.77% does little to inspire me as it is only marginally better than the average S&P 500 dividend payer. The company does tend to increase the dividend over time, so this is a potential choice if you intend to hold the stock for years. The stock did recently split 2-1, so the dividend payment per share adjusted accordingly, but remained the same on a yield basis.
Coca-Cola currently holds an international market share of over 50%, better than twice that of Pepsi (PEP). Yet the company still intends to spend over $30 billion in the coming years to further international expansion.
There are several sectors containing "necessity stocks" and food/beverages is just one of them. Each sector will obviously contain appropriate sub-sectors, and there are many companies which may fit into the design of your overall portfolio. In an attempt to smooth out some of the swings I have seen in my portfolio this year (both up and down), I intend to rebalance a portion of my profits back into such stocks displaying lower betas and above average sustainable dividends.
Of the four stocks examined today, I will likely not initiate a position in CALM unless we see a moderate pullback in the share price to the $38 range. I like what management has done in regards to growing revenue and paying down debt, but I prefer my dividend payments to be routine. Likewise, I will probably wait on Coke at this time. With the low dividend and the increase in debt, I would likely open a position if it drops below $33.
I will consider initiating a long position in both McDonald's and Heinz at current prices. McDonald's has experienced a recent pullback in the stock price with potential for future earnings growth. The dividend is solid, and it could take an asteroid to end their dominance. Heinz is trading near its high, but its record of steady, increasing dividends and the expectations of increasing earnings in the coming years lead me to believe this company will continue to appreciate while paying a quarterly bonus.
Good luck out there!