Following hot on the heels of yesterday’s catchup post; it’s Sharebuilder Tuesday again today and it’s back once more to the Consumer Defensive sector. I went through this sector only last month when I bought a mix of CLX, PG and KMB although the valuation is lower than usual because I sold my shares in TAP last month and I didn’t buy new shares in this sector with the proceeds.
Consumer Defensive 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.
Year to date, Consumer defensive stocks are above average with 5.63% gains; Technology, Utilities and Healthcare all beat it with double digit gains however. You can see a comparison of the sector performance over at Morningstar.
Here’s my portfolio as of 18-November grouped by market sector. Consumer Defensive is my lowest valued sector followed by Financial Services and Healthcare sectors. All are inside my +/- 10% rule but I’ve been in the habit of picking the underdog recently and this week is no exception.
My Consumer Defensive dividend stocks
I currently have positions in GIS, PG, KO, KMB and CLX 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 $31B. 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 19.2 is slightly lower than the industry average of 20.7 but higher than the S&P 500 average of 18.6. 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 6.08%, done 0.5% from last month.
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 $2.3B in FY2013. TTM cash flow is $1.8B, about even with FY2014’s cash flow of $1.88B.
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 $237B. 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 2.9%. Its current Payout Ratio is 69%, higher than last year’s 61% and slightly above 2012’s high of 68%. The dividend growth over the last 5 years is an annualized 8.1%.
PG has a slightly lower valuation than its industry with 24 vs. 24.5 and it’s higher than the S&P average of 18.6. 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%, unchanged from October.
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 and TTM results are currently higher at $11.6B.
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 $190B 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 2.8%. 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 23.9 compared to 22.7, and it’s higher than the S&P at 18.6. 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 3.8, down from 4.3% last month.
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 $8.3B.
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 were distributed as new shares in the new company Halyard Health (HYH) last month.
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 20.1, it beats its industry average of 24.5 but is higher than the S&P’s average of 18.6. 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 6.8%, up 0.2% from last month.
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.
The Clorox Company
Clorox (CLX) is a $13B 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 2.9%. 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 74%, below a high of 106% in 2011 but higher than the last 2 years’ level of 59%.
CLX’s P/E of 26 is above the industry average of 24.5 and the S&P’s 18.6. 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 5.5%, down 0.4% from last month.
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. The TTM cash flow is currently $692M.
I’m not looking to add new companies in this sector at present, as I already have 5 companies and I think that’s enough. So I’m just going to mention a couple of other interesting alternatives from the Dividend Champions list that are found by the following filter
- 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
Named after Systems and Services, Sysco Corp (SYY) is a $23B 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 73.9% 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 24.8 is below the industry average of 26 but above the S&P average of 18.6. 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 7.05%, up just under 1% from last month’s estimate.
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 and stand at $880M YTD.
Colgate-Palmolive (CL) is another Dividend Champion with 51 years of continual dividend growth. It’s a key rival to Proctor and Gamble, and while there’s not wrong with holding both companies, I’m happy enough with PG – I prefer PG’s higher yield and while CL’s payout ratio is a little lower, there’s nearly a 1% difference in the yield.
Pepsi Co (PEP)
PEP needs little introduction as a rival to Coca-Cola, with a slightly shorter but still impressive 42 year dividend growth history. This is another stock that I don’t really consider as I’m content with KO instead and I’d rather pick a more diverse stock than hold both KO and PEP.
Archer Daniels Midland (ADM)
ADM is an agricultural based company selling vegetable oil and other basic food & feed products. It has a 39 year dividend growth history but its yield is quite low, being below 2% at the time of writing.
Last but not least, Walgreen is a successful company operating drug stores and pharmacies with a 39 year dividend growth history. Its yield is lower than I like however, currently being below 2% and it seems quite over-valued to me.
What to buy?
Looking at the 5 stocks, they all meet my criteria of requiring a 5 year dividend growth history. They also all have a suitable dividend yield greater than 2% and all exceed my criteria requiring a 3% dividend growth rate.
The dividend yield from the 4 stocks is a narrow range from 2.8 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 CLX and KMB with KO in last place.
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.
Finally CLX lost points for having a lower credit rating at Moodys than the other 4 stocks; PG and KO are the leaders here.
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, but I decided to split my investment this week between PG, KO and continue adding to my CLX holding.
CLX has been mentioned negatively in several articles this month; mostly because of declining growth, but they have some great brands with strong market presence and I think they’re a good long term investment. It’s a little expensive at the moment but still has an fairly good yield.
So total purchases this week are:
- $75 Individual Stocks (PG)
- $75 Individual Stocks (KO)
- $150 Individual Stocks (CLX)
This purchase should increase my yearly dividend income by about $9. I’m investing $1,200 a month in my Sharebuilder account in four weekly installations of $300.
Full disclosure: I am long CLX, GIS, KMB, KO & PG.
Quote of the day
Don’t go around saying the world owes you a living. The world owes you nothing. It was here first.