This is my last purchase in October and this week it’s the turn of the Consumer Defensive sector to be the lowest weight in my Portfolio. I tend to buy from the lowest valued sector as it suggests relatively cheaper shares but until I’ve built up bigger positions, the weighting is primarily influenced by purchases. But at any rate it’s a good excuse to cycle through some stocks to see what’s what. My last purchase was back in July when I bought PG which means the sector has been doing well compared to others such as Energy which were lowest twice during that same period.
Consumer Defensive sector stocks
The Consumer Defensive sector (sometimes called Consumer Staples) consists of companies involved in the production of consumer products that are always in demand (food for example), as opposed to more luxury goods. In bad economic times, people will still spend money on basic needs and cut back on luxuries such as the latest 6th generation smartphone. Companies in this sector should be more stable than their counterparts in the Consumer Cyclical sector are. At least, that is the theory and reasoning behind the name. The sector contains companies involved in Food Processing, Beverages, Personal Products, Retail (discount), Tobacco and Cleaning Products among others.
In fact this sector has as many Dividend Champions with 25 years of dividend growth (16 Champions out of 87 Dividend paying stocks or 18.4%) as the Utilities sector (16 Champions out of 86 Dividend paying stocks or 18.6%) – these two sectors together make up 30% of Dividend Champion stocks by number of stocks and almost 40% if you weight by their contribution as a percentage.
Here’s my portfolio as of 24-October grouped by market sector. Consumer Defensive is my lowest valued sector followed by the Basic Materials and Financial Services sectors. All are inside my +/- 10% rule.
My Consumer Defensive dividend stocks
I currently have positions in GIS, PG, KO, KMB and TAP in the Consumer Defensive sector.
General Mills (GIS) is a producer of packaged foods and one of the largest producers of breakfast cereals in the US with a market cap of $30B. It holds many famous brands including Cheerios, Wheaties, Fiber One, Green Giant, Progresso, Yoplait and Haagen-Dazs.
GIS has increased its dividend for the last 11 years and it is currently $0.41 for a yield of 3.2%. It has been inconsistent in its increases; sometimes raising them in January, typically in July and most recently in April. Its current payout ratio of 60% is the highest over the last 10 years, a range which historically has fallen between 40 and 55%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 12.3%.
Its P/E of 19.0 is slightly lower than the industry average of 19.4 but higher than the S&P 500 average of 18.4. Over the last ten years, the P/E value has generally been equal or higher than the S&P average; exceptions being 2004/5 and 2009. Its projected 5% EPS growth is 6.5%, unchanged from June.
In the last ten years since 2005, Free Cash Flow has been positive each year with a low of $0.8B in FY2011 and a high of $1.8B in FY2014.
Proctor & Gamble
Proctor & Gamble (PG) produces high quality personal care products with strong brand values. If you’ve heard of Olay, Braun, Gillette, Crest, Oral-B, Vicks, Downy, Duracell, Febreze, Tide, Bounty, Charmin or Pampers, then you’ve heard of Proctor & Gamble. It’s a Fortune 500 company with a market cap of $230B. It is organized into four segments – Grooming, Health Care, Fabric and Home Care and Baby, Feminine & Family Care.
PG has increased its dividend each year for the last 58 years and it’s increased them like clockwork every April at least as far back as 2004. The dividend is currently $0.644 giving a yield of 3.0%. Its current Payout Ratio peaked in 2012 at 68% and is currently 63%, higher than last year’s 61%. The dividend growth over the last 5 years is an annualized 8.3%.
PG has a lower valuation than its industry with 21.4 vs 22.4 and it’s higher than the S&P average of 18.4. Its valuation has been higher than the S&P average every year since 2004 except for 2009 and this year looks to be no exception. Its projected EPS growth over the next 5 years is 8.3% up 0.5% from June.
Free Cash flow has been positive each year since 2004, with a low of $6.5B in FY2005 and a high of $13B in FY2010. FY2014 results were $10B.
Coca Cola (KO) really shouldn’t need any introduction – it’s one of the world’s most valuable brands; number 3 in fact as rated by Forbes after Apple and Microsoft. KO has a market cap of $179B and Forbes values the Coca-Cola brand name as being worth $54B. In case you have recently arrived from another planet, Coca-Cola is the world’s largest producer of soft drinks and juice. From its namesake Coca-Cola to Sprite, Fanta, Powerade, Minute Maid, Dasani, it also markets Schweppes, Canada Dry and Dr. Pepper brands outside the US.
KO has increased its dividend every year for the last 52 years and like PG, it has increased them consistently, every March, this year being no exception. Its dividend of $0.305 provides a current yield of 3.0%. Payout Ratio has been increasing over the last 4 years and is currently 66%; the highest level of the last 10 years. Annualized Dividend growth over the last 5 years is 8.3%.
KO’s P/E is slightly higher than its industry average with 21.9 compared to 21.3, and it’s higher than the S&P at 18.4. Over the last ten years, KO’s P/E has always been higher than the S&P except for 2010 although the S&P average has been catching up over the last 3 years. Its projected EPS growth over the next 5 years is 4.3, down over 2% from last June.
Free Cash Flow has been positive over the last 10 years, with a low of $4.5B in FY2006 and a high of $7.9B in FY2013. The TTM Free Cash Flow for FY2014 is currently even higher at $8.5B.
Kimberly Clark (KMB) is a global manufacturer of tissue, personal care and health care products with a $42B market capitalization. It owns some strong brands such as Kleenex, Scott, Huggies and Kotex. It’s organized into four global segments – Personal Care, Consumer Tissue, Professional and Health Care. However in December last year, it announced its intention to spin-off the Health Care division which will be distributed as new shares (tax-free) in the new company with a completion date towards the end of this year.
KMB has increased its dividend every year for the last 42 years, currently giving $0.84 a share for a yield of 3.0%. It’s likewise a very stable and consistent dividend growth stock, with dividend increases arriving in March each year. Payout ratio is on a par with last year at 58.9%, down from its all-time high of 70% in 2011. Annualized dividend growth over the last 5 years is 7%.
With a P/E of 20, it beats its industry average of 22.4 but is higher than the S&P’s average of 18.4. Historically over the last 10 years, its P/E has been equal to or higher than the S&P average except for 2009 & 2010. This year, its P/E has been increasing faster than the S&P. Projected EPS growth over the next 5 years is 6.6%, down 0.3% from last June.
Free Cash Flow has been positive for each of the last ten years with a low of $1.3B in FY2011 and a high of $2.4B in FY2004. TTM Free Cash Flow for FY2014 is $2.2B, higher than last year’s $2.1B.
Molson Coors Brewing Company
Formed in 2005 by the combination of Adolph Coors and Molson and later forming a joint venture with SABMiller, Molson Coors (TAP) markets and distributes over 60 beer brands such as Coors Light, Miller Lite, Blue Moon and Killian’s Irish Red. It is currently valued with a market cap of $13.5B.
TAP pays $0.37 a share which gives a yield of 2%. TAP has increased its dividend by an annualized 10% over the last 5 years, however last year it did not increase dividends. Payout Ratio over the last ten years ranges from 15 to 52% and the current ratio of 36% is in the middle of the range.
TAP’s P/E of 18.7 has fallen of late, being lower than the industry average of 20.3 but higher than the S&P’s average of 18.4. It has a 10 year P/E history that is typically higher than the S&P average but this year is matching last year’s performance with a P/E value level with the S&P average.
Free Cash Flow has always been positive for each of the last 10 years with a low of $16M in 2005 and a high of $874 in 2013. TTM for FY2014 is above that at $883B.
I’ve currently place a sell order on my TAP shares with a limit price of $74. If that threshold is reached I’m selling out of this position. I bought TAP originally just because of their brand of beer before I’d heard about dividend growth investing. So I don’t consider this a core DGI holding and I’m planning to exit this position. In the meantime, it’s yielding 2% which I’ll take and re-invest elsewhere.
Choosing new stocks to consider
Because I plan on exiting my TAP position, I’ve added two more stocks for comparison from the Dividend Champions List.
My usual high level screener applies as I start from the Dividend Champions list.
- Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in (Consumer Staples)
- Include only stocks with a dividend yield above 2%
- Include only stocks with an estimated Next Year growth > 0%
- Include only stocks with an estimated 5 Year growth > 0%
- Exclude ADRs and non-US companies
The Clorox Company
Clorox (CLX) is a $12B Dividend Champion with a 37 year dividend growth history. Aside from its namesake brand of cleaning bleach, it also owns diverse brands such as Burt’s Bees, Liquid-Plumr, Brita water filters and Glad storage bags. It operates in 4 segments: Cleaning (Home, Laundry and Professional), Household (Bags, Cat Litter & Charcoal), Lifestyle (Salad dressings & Water filters) and International.
CLX’s current dividend of $0.74 gives it a yield of 3.0%. It has been increasing dividends consistently in July (since 2007) and annualized dividend growth over the last 5 years is 8.8%. Its payout ratio is currently 67%, below a high of 106% in 2011 but higher than the last 2 years’ level of 59%.
CLX’s P/E of 23.4 is above the industry average of 22.4 and the S&P’s 18.4. The P/E is has always been higher than the S&P average except for 2009, and so far this year its been increasing faster than the S&P. Projected EPS growth over the next 5 years is 5.9%.
Free Cash Flow has also been positive each year for the last 10 years, ranging from a low of $342M in FY2006 to a high of $629M in FY2014.
Named after Systems and Services, Sysco Corp (SYY) is a $22B international company specializing in marketing and food distribution for restaurants, healthcare and education facilities. It reports financial results in two operating companies: Broadline and SYGMA.
SYY is another Dividend Champion with a 44 year dividend growth history. Its $0.29 per share gives it an annual yield of 3.0% and it has an annualized 5 year growth rate of 3.6%. It has a stable dividend increase schedule with dividend increases coming at the end of each year. SYY’s payout ratio of 73.4% is more or less a continuation of an upward trend starting in 2004 from a low of 39%, with 72.9% reported in FY2014.
Its P/E of 24.1 is below the industry average of 24.8 but above the S&P average of 18.4. SYY typically has a higher P/E value than the S&P and it’s been increasing faster than the S&P since 2010. SYY has a projected 5 year EPS growth estimate of 6.2%.
Free Cash Flow has been positive for each of the last 10 years. 2010 marked the low value with $291M and the highest amount was reached in 2009 with $1.1B. FY2014 results were just under this at $970M.
What to buy?
Looking at the 7 stocks, my criteria of requiring a 5 year dividend growth history eliminates increasing my current holdings in TAP from the start.
The remaining 6 companies have suitable dividend yield, and all exceed my criteria requiring a 3% dividend growth rate.
The dividend yield from the 4 stocks is a narrow range from 3 to 3.2%. To compare the value of their future dividend payment, I average the predicted 5 year growth value with the historical dividend growth and use this percentage to increase the current dividend yield over the next 5 years. This method ranked GIS & PG as the most valuable, closely followed by SYY, then CLX, KMB and KO.
SYY, CLX, KMB, KO and PG all gained extra credit for consistently increasing their dividends over the last 5 years. GIS wasn’t as consistent and changed its pattern of increases last year.
GIS was also marked down because of its 11 year dividend growth history which while great, is a long way behind the 30+ year history of the others.
Here’s the outcome visually.
The score column shows the ranking I’m using and summarizes my analysis, it’s calculated from a weighting of the different criteria added together and aids me in valuing one stock over another. It tends to favor higher yields and stable payments.
My purchases this week
I like all of the stocks to be honest, and so I decided to split between PG, KMB and start a new position in CLX with $100 each.
PG is reaching my dividend weight limit and currently contributes 3.8% of my dividend income, so I didn’t want to go all in. Because I plan of exiting out of TAP, I wanted to replace it with something stable and I chose CLX over SYY because of higher yield and I believe it’ll manage a higher growth rate than SYY. KMB was more or less tied with KO but I decided to go with KMB this time. I’m also adding to my Vanguard funds this week too.
So total purchases this week are:
- $100 Individual Stocks (PG)
- $100 Individual Stocks (KMB)
- $100 Individual Stocks (CLX)
- $500 High Dividend Yield Index Fund (VHDYX)
- $500 High Yield Corporate Bond Fund (VWEHX)
This purchase should increase my yearly dividend income by about $49.
Full disclosure: I am long TAP, GIS, KMB, KO & PG.
Previous Purchase – Energy Sector
Quote of the day
To succeed in life, you need two things: ignorance and confidence.