The Top-Ranked Dividend Growth Stocks In The Consumer Staples Sector

Jun. 05, 2020 9:00 AM ETBF.B, CL, COST, HRL, KMB, KO, PEP, PG, TR, WMT31 Comments

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Summary

This article presents the top-ranked dividend growth stocks in the Consumer Staples sector.
To rank stocks, I sort them by decreasing quality scores based on DVK Quality Snapshots and break ties by comparing up to three additional metrics, in turn.
The article includes tables presenting quality indicators, key metrics, and fair value estimates.
Investors looking to expand their Consumer Staples sector holdings may find the information in this article useful as a basis for further research.

While the stock market has recovered much of the losses suffered in late February and March, the economic impact of the COVID-19 pandemic remains significant. Nearly 40 million Americans have filed unemployment claims in April and May, and GDP numbers will soon show the largest contraction since the Great Depression. In my view, it is crucial for dividend growth investors to focus on quality even more than before!

In April, I presented the three top-ranked dividend growth stocks in each of the GICS sectors. Following a reader's suggestion, I decided to start a new series of articles ranking dividend growth stocks in each GICS sector by quality score. The first article presented the top-ranked Industrials.

This article presents the ten top-ranked dividend growth stocks in the Consumer Staples sector.

I consider dividend growth stocks to be stocks with increasing dividend payouts in each of the past five years. Dividend Radar publishes a list of dividend growth stocks every Friday.

To rank dividend growth stocks, I sort them by decreasing quality scores as determined by DVK Quality Snapshots and I use three additional metrics to break ties.

Sector Averages and Performance Comparison

Dividend Radar provides a spreadsheet with dividend and fundamental data. It is quite informative to compare sector averages and the historical performance of sectors over different periods:

Sources:Dividend Radar (May 29, 2020) • Fidelity Research (4 June 2020) GoogleFinance

The table is color-coded to show the highest (green) and lowest (red) values in each column.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

It is interesting to note that Consumer Staples have trailed the performance of the S&P 500 in each of the time frames in the charts above.

Quality Assessment

DVK Quality Snapshots provide an elegant and effective way to assess the quality of dividend growth stocks. I use DVK's scoring system but have my own systems to rate and rank dividend growth stocks.

DVK Quality Snapshots scoring system and my rating system

My rating system maps to quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range 15-25, while Speculative Grade ratings have quality scores below 15 points.

To rank stocks, I sort them by descending quality scores and break ties by considering the following factors in turn:

SSD Dividend Safety Scores
S&P Credit Ratings
Dividend Yield

I rarely need to break ties with Dividend Yield.

Top-Ranked in Consumer Staples

Here are the top 10 dividend growth stocks in the Consumer Staples Sector:

The stocks I own in my DivGro portfolio are highlighted.

1. The Procter & Gamble Company (PG)

Founded by William Procter and James Gamble, SWITCH is focused on providing branded consumer packaged goods in more than 180 countries. PG has five reportable segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby Care and Family Care. The company was incorporated in Ohio in 1905 and is headquartered in Cincinnati, Ohio.

2. Costco Wholesale Corporation (COST)

Founded in 1976 and based in Issaquah, Washington, COST operates more than 700 membership warehouses in the United States and internationally. The company offers branded and private-label products in a range of merchandise categories. COST also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business.

3. PepsiCo, Inc. (PEP)

PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP and Tropicana, and food and snacks under brands such as Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.

4. Colgate-Palmolive Company (CL)

CL is a consumer products company, whose products are marketed in more than 200 countries and territories throughout the world. The company operates in two product segments: Oral, Personal and Home Care, and Pet Nutrition. CL was founded in 1806 and is headquartered in New York, New York.

5. Walmart Inc. (WMT)

WMT is the world's largest retailer and the biggest private employer in the world. Based in Bentonville, Arkansas, and founded in 1962, the company is a multinational retailer with more than 11,000 stores worldwide. Additionally, the company operates e-commerce websites in many countries. WMT operates through three segments: Walmart U.S., Walmart International, and Sam's Club.

6. The Coca-Cola Company (KO)

KO is the world's largest beverage company and the leading producer and marketer of soft drinks. Along with Coca-Cola, recognized as the world's best-known brand, The Coca-Cola Company markets four of the world's top five soft drink brands, including diet Coke, Fanta, and Sprite. KO was founded in 1886 and is headquartered in Atlanta, Georgia.

7. Hormel Foods Corporation (HRL)

HRL is a multinational manufacturer and marketer of consumer-branded food and meat products. The company sells its products through sales personnel, as well as through independent brokers and distributors. Customers include retailers, hospitals, nursing homes, and marketers of nutritional products. HRL was founded in 1891 and is based in Austin, Minnesota.

8. Brown-Forman Corporation (BF.B)

Founded in 1870 and headquartered in Louisville, Kentucky, BF.B manufactures, bottles, imports, exports, markets, and sells various alcoholic beverages in over 160 countries. The company provides spirits, wines, ready-to-drink cocktails, whiskey, vodka, tequilas, champagnes, wines, brandy, and liqueur. BF.B sells its products under a variety of brands, including Jack Daniel’s.

9. Kimberly-Clark Corporation (KMB)

Using advanced technologies in natural and synthetic fibers, non-wovens, and absorbency, KMB manufactures a range of personal care, consumer tissue, and professional products. Brands include Huggies, Kleenex, Scott, and Cottonelle. The company sells its products directly to retail outlets and through e-commerce. KMB was founded in 1872 and is headquartered in Dallas, Texas.

10. Tootsie Roll Industries, Inc. (TR)

KR, together with its subsidiaries, manufactures and sells confectionery products primarily in the United States, Canada, and Mexico. The company sells its products under various trademarks, including Tootsie Roll, Tootsie Pops, Dots, Junior Mints, and Sugar Babies. TR was founded in 1896 and is based in Chicago, Illinois.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak(Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

The table includes a column for the Chowder Number (CDN), a popular metric for screening dividend growth stocks for possible investment. The metric favors dividend growth stocks that are likely to produce annualized returns of at least 8%. The CDN column is color-coded to indicate the likelihood of delivering annualized returns of at least 8%. Green means likely, yellow means less-likely, and red means unlikely. I consider green CDNs favorable.

I provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

These are all high-quality dividend growth stocks! Based on quality scores, I rate PG Exceptional, COST, PEP, CL, WMT, and KO, Excellent, and HRL, BF.B, KMB, and TR, Fine.

Only PEP is trading at a slightly discounted valuation, and only HRL has a favorable CDN. Of the remaining stocks, COST would interest me at $280 per share. Given COST's annualized dividend of $2.80, the stock would yield 1% at $280 per share.

Last month, PEP made my list of 10 top-ranked high-quality stocks with favorable Chowder numbers trading below fair value. Since then, PEP's share price increased by about 1%, pushing the stock's yield and CDN down just enough to move it out below the favorable range (12 and higher for stocks yielding at least 3%).

Nevertheless, I think PEP still is worth considering. The stock is a Dividend Champion with a 48-year dividend increase streak and steady dividend growth:

Source: Portfolio-Insight.com

In fact, last week I added some shares to my existing position and I'm looking to add more shares if the share price drops below $130 per share.

Below is a chart showing the performance of the 10 top-ranked Consumer Staples since February 19 when the S&P 500 closed at a record high. Only TR and WMT are in positive territory, and seven of the top 10 outperformed the S&P 500 over this time frame.

Concluding Remarks

Stock prices have recovered nicely since concerns about the COVID-19 pandemic wreaked havoc in the stock market in late February and early March. The full impact of the pandemic on the economy, earnings, and dividends remain unclear. In my view, the best defense for dividend growth investors is to invest in highest-quality stocks. I identify such stocks using DVK Quality Snapshots, which provide an elegant and effective way to assess the quality of dividend stocks.

Unfortunately, only one of the 10 top-ranked Consumer Staples sector stocks is trading at a discounted valuation, PEP.

I hope this article will give dividend growth investors looking to expand their Consumer Staples sector holdings a good starting point for stock selection and further research. But I would wait for more compelling entry points before buying more shares.

As a bonus, here are tickers of lower-ranked dividend growth stocks in the Consumer Staples sector.

The quality scores of these tickers range from 21 (for MKC) to 19 (for SYY), all Fine stocks, and from 18 (for PM) to 16 (for MED), all Decent stocks, according to my rating system.

Thanks for reading! If you have a preference, let me know which sector I should cover next.

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