XLP: Consumer Staples Performance And Valuation Update

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About: Consumer Staples Select Sector SPDR ETF (XLP), Includes: ADM, CAG, CLX, COST, COTY, CPB, EL, GIS, HRL, HSY, K, KHC, KMB, KO, KR, LW, MDLZ, MKC, MO, PEP, PG, PM, SJM, SPY, SYY, TSN, WBA, WMT
by: BOOX Research
Summary

XLP just reached a new all-time high and is up 15.5% YTD 2019.

Fund has outperformed S&P 500 over the past year with lower volatility.

Article presents performance data and valuation metrics across all holdings.

The Consumer Staples Select Sector SPDR ETF (NYSE:XLP) is one of the largest and most liquid sector-specific exchange-traded funds with $11 billion in total assets under management. The term 'consumer staples' refers to goods that are considered necessities, or at least more in line with basic day-to-day needs. The idea is that these companies are less exposed to changes in the economic cycle, as consumers in a recessionary scenario would look to cut out 'discretionary' purchases before giving up essentials like food and beverages, household and personal items, along with alcohol and tobacco. For this reason, staples as a group are often seen as lower risk on average. While some of the companies here can often be as volatile as stocks from any other sector, XLP does a good job of diversification and has a lower beta than the overall market. This article highlights the recent performance and current valuation metrics of the XLP consumer staples ETF.

XLP stock price chart. source: FinViz.com

XLP ETF

XLP is comprised of 33 holdings with Procter & Gamble Company (PG) given the highest weighting at 15.1% in the ETF. The company is the prototypical consumer staples stock with over 100 product brands across 10 categories. Walmart Inc. (WMT) has a larger market cap at $304 billion but a smaller 8.4% weighting in the ETF since a large portion of its business includes items that fall into the discretionary category like games and electronics. XLP is up 15.5% in 2019, nearly matching the performance of the S&P 500 (SPY). Over the past year, however, XLP has outperformed SPY, up 15.5% compared to a 4.0% price return for SPY.

Chart Data by YCharts

The performance over the last year includes a historically volatile period during Q4 2018 when SPY technically entered a bear market, down 20% from the previous all-time high. XLP had a smaller draw-down, falling 10% at its lowest point highlighting the attractive attributes of the lower-risk sector. One of the themes in equity markets over the past year has been the relative strength of "value" factor stocks compared to "growth," which dominated returns for much of the past decade. XLP is again trading at a new all-time high which is a reflection of the strong performance among the top holdings. Six of the top 10 stocks in the group are up over 20% in 2019.

XLP Holdings Performance

XLP Holdings performance. source: data by YCharts/ author table

Year to date, considering data as of June 9, Coty Inc. (COTY) is the best performing stock in the group, up an impressive 110.4%. The cosmetics and beauty company with brands like CoverGirl and Max Factor beat Q1 earnings back in February which boosted the stock price, sending shares up 20% on the report. The company actually has the smallest weighting in all of XLP at just 0.3%.

Among industries groups, package foods and farm products have been among the biggest winners. Tyson Foods, Inc. (TSN), Conagra Brands, Inc.(CAG), General Mills, Inc. (GIS), J.M. Smucker Co. (SJM), and Campbell Soup Co. (CPB) are among the top 9 gainers, each with a return above 30% in 2019. Among many of the stocks, the impressive numbers this year are largely based on the extreme volatility that ended 2018. Equity markets bottomed in late December, and moves this year have been a giant rebound on the heels of solid earnings reports and better-than-expected economic activity through Q1 returning to previous all-time high levels of 2018. Statements by the Fed signaling a more accommodative policy stance has improved the risk environment despite ongoing concerns over the U.S.-China trade dispute.

The exception in the packaged foods industry strength is The Kraft Heinz Co. (KHC) which is the worst performer and down 31% in 2019, and an even larger 56% from its 52-week high. In February, the company reported a $15.4 billion impairment write-off, one of the largest in corporate history. The company has been rocked by accounting irregularities and SEC investigation. It's been a lot to digest for major investors and a heavy burden on the company's 29-year old guru CFO David Knopf that entered the position in 2017.

Walgreens Boots Alliance, Inc. (WBA) is also a poor performer, down 22.8% in 2019. WBA is also down 40% from its 52-week high. The stock has trended lower all year struggling with its pharmacy segment, noting changing reimbursement models and lower prices for generic drugs have changed its operating environment. The company has issued weak guidance for the year ahead and sentiment remains poor.

XLP Holdings Valuation

XLP Holdings valuation/growth metrics. source: data by YCharts/ author table

The table above presents valuation metrics for XLP Holdings sorted by industry group. The average forward price to earnings ratio based on the data above is 20.2. The trailing-twelve-month dividend yield is 2.7%. The table below shows average dividend yield by industry group.

XLP Holdings dividend yields. source: data by YCharts/ author table

Tobacco stocks Philip Morris International Inc. (PM) and Altria Group, Inc. (MO) lead the sector with a 5.9% dividend yield. Kraft Heinz cut its quarterly dividend to $0.40 taking its current forward yield to 5.6%. The stated yield for the ETF is 2.7%.

Conclusion

XLP allows investors to take a tactical or strategic view on the sector, isolating its specific equity factors from the broader market. It's important to note that many of the companies in XLP have international operations and face risks to global cyclical trends beyond the United States. Indeed, Procter & Gamble has 55% of revenues from international markets. Some of the companies may have individual factor tilts beyond consumer staples. Diversification is well managed in this fund through a solid list of world-class companies. I have no opinion on the direction of the ETF from current levels.

XLP Key Stats. source: State Street Global Advisors

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