Consumer Staples is one of my favorite sectors due to its lower than average risk. This sixty-something Texan likes consumer staples because seldom is heard the discouraging words "dividend cut" - or "significant earnings disappointment". These are mostly not your get rich stocks - they are your stay rich stocks. These are the nest egg protection stocks. On the other hand, their lower earnings and dividend growth expectations could make them more vulnerable to downward price adjustments once interest rates begin to normalize. This sector's 2016 price appreciation is probably due to the slower pace that normalization is projected to happen. Let's look at the 2016 year to date data:
Large and Mid-Cap Consumer Staples 07/11/16
The Q2-16 dividend is used for yield calculations. The second Dividend/EPS ratio has the 2017 EPS projection as the denominator. The change in the target, EPS and target is the percentage change in the consensus 2016 projection that has happened since the beginning of 2016. "Div 1 yr" measures the change in the dividend since Q2-15. "Div 5 yr" measures the average change in the dividend since Q2-11. LANC paid a special dividend of $5.00 in Dec of 2015 - special dividends are not included in my stats. SAFM has paid special dividends of $0.50/share in 2014 and 2015. HSY rejected a buy-out offer on 6-30 - it jumped 17% on the news.
|Company||Price||Price||/Quarter||Yield||EPS16||EPS17||Price||Pr+Div||EPS16||EPS17||Target||Div 1yr||Div 5yr|
|The SPY or S&P 500 EFT is 4.67% year to date. - and with unreinvested dividends is 5.72% year to date.|
|The KXI or Consumer Staples ETF is 8.01% year to date - and with unreinvested dividends is 9.20%.|
|The RHS or Guggenheim S&P 500 Eq Wt Cons Staple ETF is 11.95% year to date - and with unreinvested dividends is 12.84%.|
|With the 10 Treasury at 1.34% and the sector average yield on the Q1 dividend at 2.15% - the spread is 81 basis points.|
|* The change in the dividend is for the last twelve months and not year to date.|
There are two metrics that strongly concern me - and the first is in the above spreadsheet. The sector average yield in this sector is - based on recent history - too dang low. Here are some numbers for context:
Historical yields for the sector:
|Mar 2010: 2.77%||June: 2.92%||Sept: 2.92%||Dec: 2.78%|
|Mar 2011: 2.84%||June: 2.76%||Sept: 2.94%||Dec: 2.81%|
|Mar 2012: 2.81%||June: 2.82%||Sept: 2.80%||Dec: 2.81%|
|Mar 2013: 2.42%||June: 2.47%||Sept: 2.58%||Dec: 2.48%|
|Mar 2014: 2.53%||June: 2.54%||Sept: 2.61%||Dec: 2.47%|
|Mar 2015: 2.52%||June: 2.61%||Sept: 2.58%||Dec: 2.33%|
|Mar 2016: 2.27%||June: 2.16%||Sept:||Dec:|
I will get back to valuation problems later. For now, I want to show some numbers that help explain relative valuation and price performance by doing some numbers parsing:
The Predictive Power of the Dividend/EPS Ratio on Valuations: Dividend to EPS ratios range from as low as the teens to the 80s - and may look all too random. But this ratio - during most time periods - helps explain the variety of yields and P/E ratios. There is some correlation to YTD price changes as well. This test is done for companies with RRRs (or risk related Required Rates of Return) under 11%.
The following stocks had Q2-16 Dividend/EPS ratios of less than 45%: CPB, HRL, INGR, SAFM and TSN. Their YTD mean price gain = 20.21% and 4 of the 5 beat the sector mean yearly price gain of 14.01%. Their mean yield = 1.34% and they had an average price/earnings ratio = 18.89. Their mean LTM dividend growth = 14.63% and they had an average CAGR projection of 7.80.
The following had Q2-16 Dividend/EPS ratios of more than 45% - but less than 52%: ADM, CAG, DPS, LANC, MKC and SJM. Their YTD mean price gain = 15.67% and 4 of the 6 beat the sector mean yearly price gain. Their mean yield = 2.00% - and they sold at an average price/earnings ratio = 24.44. Their mean LTM dividend growth = 6.41% and they had an average CAGR projection of 6.42.
The following companies had Q2-16 Dividend/EPS ratios of more than 52%: KO, CL, CLX, FLO, GIS, HSY, K, KMB, PEP and PG. Their YTD mean price gain = 9.92% and 2 of the 10 beat the sector mean yearly price gain. Their mean yield = 2.64% - and they sold at an average price/earnings ratio of 23.80. Their mean LTM dividend growth = 5.87% and they had an average CAGR projection of 5.74.
For investors wanting to pry loose a decent yield from their portfolio, it is discouraging news to constantly find that if they want decent dividend growth and price appreciation, they need to reject those options with high payout ratios. But that is the way it is. Let's do one more data parsing:
The relationship between CAGR projections and yields: While yields can be influenced by risk, the influence of dividend growth projections can be seen.
The following had CAGR projections over 8.5%: INGR and TSN. Their current average yield is 1.12%.
The following had CAGR projections under 8.5% but over 6.5%: DPS, FLO, HSY, HRL, MKC, SAFM and SJM. Their current average yield is 1.95%.
The following had CAGR projections under 6.5%: ADM, KO, CL, CLX, GIS, K, LANC, PEP and PG. Their current average yield is 2.51%.
I also want to show some longer term numbers - and that is done below.
Price Changes and Total Returns Since the Beginning of 2012, 2011 and 2010
If one is needing or wanting share price appreciation - then one needs dividend growth. The top performers in this sector are those with the most dividend growth. And those with the best dividend growth also happen to be those with the lower payout ratios.
Let's move on the current valuations based on the P/E ratios along with some EPS history:
Price/Earnings Ratios 07-11
Most of the 2018 Projections are from NASDAQ.
LANC lacked a 2018 analyst projection. I projected sector average 5% growth so that it would have one.
|EPS / Share||% EPS Growth||Price/EPS||Current Fiscal Year||Year|
The spreadsheet above contains the second metric that concern me - the current P/E ratio is too dang high. The data that follows provides some context.
Historical P/E Ratios for the sector:
|Mar 2010: 14.74||June: 13.84||Sept: 14.45||Dec: 15.93|
|Mar 2011: 15.55||June: 16.38||Sept: 15.52||Dec: 16.58|
|Mar 2012: 16.57||June: 16.64||Sept: 17.15||Dec: 17.45|
|Mar 2013: 18.94||June: 18.56||Sept: 18.41||Dec: 19.87|
|Mar 2014: 18.77||June: 19.31||Sept: 19.23||Dec: 20.55|
|Mar 2015: 20.55||June: 20.21||Sept: 19.45||Dec: 21.44|
|Mar 2016: 21.58||June: 22.74||Sept:||Dec:|
I started doing quarterly updates for this sector in 2010. I can reconstruct year end historical numbers going back to 2005. The spreadsheet below does that. Starting the P/E numbers with 2010 could give the impression that the current P/Es are sky high and without precedent. There is some deja vous in the current ratios. We were near this level in 2006.
Historical P/E Ratios for specific companies:
I want to move on to the spreadsheet I use to set my dividend CAGR (Compound Annual Growth Rate) projections.
Now that I have set my dividend CAGR projections, I want to move to the metric I used to modify my RRR or Required Rate of Return assessment - and that metric is historical earnings projections accuracy.
The accuracy rating is like a Yahoo stock rating - the lower, the better. There are some great accuracy histories in the spreadsheet above. CPB has not had an earnings disappointment since 2010 - and that disappointment was only by 2%. DPS and HTL have similar histories - only one disappointment since 2010 and the size of that disappointment was tiny. If you want to know why the "yield + CAGR" numbers are relatively small in this sector - these numbers provide the answer. This sector has earnings projections one can believe in. Now let's move on to the final spreadsheet.
This spreadsheet used my two 'price-implied' dividend CAGRs - and that metric requires some explanation.
To calculate the single price implied CAGR that I have historically displayed - I take the RRR and subtract the yield. What justifies that formula? When a stock is correctly valued AND the CAGR is not discounted, then the Yield + CAGR = RRR. Doing the kind of formula manipulation we learned in algebra, we can arrive at a formula for CAGR by subtracting 'Yield' from both sides of that equation. Doing that, we get to 'CAGR = RRR - Yield'. I would want the RRR to be higher for the riskier stocks for such a formula to produce meaningful output.
When it comes to arriving at a price-implied CAGR from the P/E ratios, I want the opposite. A low ratio would logically belong to a stock with a lower CAGR or higher risk - and a high ratio would logically belong to a stock with a higher CAGR or lower risk. My formula is 'Ratio - adjustment = CAGR'. The AA rated stocks - along with stocks with excellent accuracy histories - have RRRs of around 8.0 and P/E subtractions of 14 - times a modifier that results in the sector average price-implied CAGR close to the projected CAGR. With the sector currently having high valuations, the current modifier is '0.6'. The A rated to BBB+ rated stocks tend to have RRRs of 8.5 and P/E subtractions of 11. The 'high CAGR' stocks have high RRRs - usually close to 10. The commodity sensitive ADM has a RRR of 10.5. I began the effort of setting price implied CAGRs based on P/E ratios in Q4-14 for this sector. The formula I use to set the adjustment numbers is still in flux.
Some of the math I do is near elegant - and some of the math is like making sausage - the less you know about it, the better. Making price implied CAGRs is more of a sausage making process. I want to show two examples. CPB has an RRR of 8 due to its excellent earnings projection accuracy and its BBB+ credit rating. The P/E adjustment for an 8 RRR is 14. With a P/E if 22.39, the adjustment before the second modification takes the number to 8.39. Then 8.39 time the modification number of 0.6 get you to 5.03 - which is the P/E implied CAGR. FLO has an RRR of 10 due to its very poor earnings projection accuracy and its lack of a credit rating. The P/E adjustment for an 10 RRR is 8. With a P/E if 18.69, the adjustment before the second modification takes the number to 10.69. Then 10.69 time the modification number of 0.6 get you to 6.42 - which is the P/E implied CAGR. Please keep in mind the P/E implied CAGR is a redundant indicator.
Why do I provide two different price implied CAGRs? Using the 'CAGR = RRR - Yield' formula, the CAGR can not be greater than the RRR. There are not that many stocks with 5 year CAGRs above the 10% to 14% range I use for RRRs - but there are some. Due to EPS' failing to grow in equally stair stepped increments, there are times when the 'PE ratio' based formula fails to produce meaningful output. A stock can also sell at a logical P/E ratio based on EPS projections other than the 2016 projection. The ratios that I use in the following spreadsheet are 2016 EPS projection based ratios.
Yield + CAGR Total Return Expectations
|Company||Q2-16||Factoid's||Total||Bonds||EPS||My||Total Rtn||Consensus||Price Implied CAGR||Div||Price|
I want to remind readers that I adjust my price implied CAGR derived from the P/E ratio metric so that the sector average for that metric comes close to matching my projected CAGRs. Due to the current high valuations - there is a lot of downward adjusting going on. I would consider a stock a buy only if the projected CAGR is noticeably above the price implied numbers.
With the sector average yield for this sector being well below the historical average, I am personally not adding to my holdings. My targeted allocation to this sector is 10%. I am currently at 12% due to lots of share price appreciation.
But what if you are wanting to add to your weighting due to you current allocation being a bit too small? What looks relatively under valued now? You will find the answer in the 'Total Return - RRR' metric. Those with positive numbers are relatively under valued. Those with negative numbers are relatively over valued.
What do the numbers suggest as buys?
DPS' 2.20% yield and 8.0% CAGR combined with its 8.5% RRR makes it a buy. KMB's 2.45% yield and 6.5% CAGR combined with its 8.0% RRR makes it a buy. I really want to see some fiscal 2017 numbers before I have full faith and confidence in the EPS jump that SJM is projecting. But SJM's 1.75% yield and very conservative 8.0% CAGR combined with its 8.5% RR makes it a buy. Even if you want a bigger weighting in this sector via the purchase of more options - given the current valuations, I would wait.
Disclosure: I am/we are long CL, GIS, HRL, HSY, INGR, PEP, PG, SJM.
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.