For my automatic Sharebuilder purchase this week I added to 2 positions in Consumer Defensive stocks. Here’s a summary of the 5 stocks in my portfolio plus 2 additional companies on my watch list.
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 or smartwatch. 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 industries among others.
Year to date, Consumer defensive stocks are above average with 3.26% gains; the Real Estate, Healthcare and Communications sector all currently beat it. You can see a comparison of the current sector performance at Morningstar.
One change this month is that I’m now calculating Payout Ratio based on Dividends Paid as a percentage of annual (trailing twelve month) Free Cash Flow. Previously I used DPS / EPS.
The numbers in this post are taken from last Saturday (07 March) since that’s the day I set my automatic purchase configuration in Sharebuilder.
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 $0.44 for a yield of 3.3%. It has been inconsistent in its increases; sometimes raising them in January, typically in July and most recently in April. This year’s increase is 7%. Its current payout ratio of 64% is the second highest over the last 10 years, beaten by an 85% payout in 2011. The range typically falls between 35 to 50%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 12.3%.
Its P/E of 22.2 is higher than the S&P 500 average of 19.5. 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 6.1%.
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 $1.7B, similar to FY2012’s cash flow of $1.7B.
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 $223B. 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 $0.6436 giving a yield of 3.1%. Its current Payout Ratio is 60%, an improvement on last year’s 70%, although the levels of the last 4 years have been markedly higher than prior years with an average 65% payout compared to 42% . The dividend growth over the last 5 years is an annualized 8.0%.
PG has a higher valuation than the S&P500 average with 25.6 vs. 19.5. 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 6.7%.
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 $11.8B.
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 $181B 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 53 years and like PG, it has increased them consistently every March; this year being no exception. Its dividend of $0.33 provides a current yield of 3.1% and the dividend increased by 8% this year. Payout Ratio has been increasing over the last 4 years and is currently 65%; this is in line with the range over the last 10 years which has varied from 49% to 67%. Annualized Dividend growth over the last 5 years is 8.3%.
KO’s P/E is slightly higher than its industry average with 26.5 compared to the S&P at 19.5. Over the last ten years, KO’s P/E has always been higher than the S&P except for 2010 so today’s levels aren’t wildly excessive. Its projected EPS growth over the next 5 years is 4.9%.
Free Cash Flow has been positive over the last 10 years, with a low of $4.5B in FY2006 and a high of $8.3in FY2014. The TTM Free Cash Flow is currently unchanged 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 in three global segments – Personal Care, Consumer Tissue and Professional.
KMB has increased its dividend every year for the last 43 years, currently giving $0.88 a share for a yield of 3.3%. It’s likewise a very stable and consistent dividend growth stock, with dividend increases arriving in March each year. This year’s increase was 4.8%. Payout ratio is currently 70%, the same as last year’s 70% and down from its all-time high of 85% in 2011. Annualized dividend growth over the last 5 years is 7%.
With a P/E of 26.8, it beats the S&P’s average of 19.5. Historically over the last 10 years, its P/E has been equal to or higher than the S&P average except for 2009 & 2010. Starting last year however, its P/E value is much higher than its typical premium over the S&P. Projected EPS growth over the next 5 years is 7%.
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 is $1.8B, the same as FY14’s level as first quarter results aren’t available yet.
The Clorox Company
Clorox (CLX) is a $14B 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 2.7%. 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 54%, below a high of 76% in 2012 but comfortably within its range of the last 4 years.
CLX’s P/E of 27.9 is above the S&P’s average of 19.5. The P/E is has always been higher than the S&P average except for 2009, although the premium over the S&P is higher than typical levels starting from 2014. Projected EPS growth over the next 5 years is 7%.
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 $699M.
Other companies on my watch list
Sysco (SYY) has been in my watch list for a while now but I’ve not purchased any. This month I added Diageo (DEO) from across the pond to my watch list. The US Dividend Champion List only results in 17 stocks when I filter it, so this sector is more restricted in choice than most. Interestingly, the US list shows DEO as a cyclical stock but I’m classifying it as defensive.
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 45 year dividend growth history. Its $0.3 per share was a 3% increase from the previous year and gives it an annual yield of 3.1%. The annualized 5 year growth rate is 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% is an increase in its level from 2013, but much improved from >100% values reached in 2010 through 2012.
Its P/E of 26 is above the S&P average of 19.5. SYY typically has a higher P/E value than the S&P but the premium since 2014 is much higher than is typical. SYY has a projected 5 year EPS growth estimate of 7.1%.
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.
At $72B, Diageo plc (DEO) is the world’s largest producer of alcoholic spirits with some famous brands including Smirnoff (vodka), Johnnie Walker (scotch whiskey), Baileys (liqueur) and Guinness (stout). It was formed in 1997 from a merger between Guinness and Grand Metropolitan, and for a period of time the company owned Pillsbury and Burger King. It reports in 5 regions: North America (45% FY14 Profit), Western Europe (19%), Asia Pacific (9%), Latin America (10%) and Africa / Eastern Europe (17%).
Diageo is a UK listed company with the symbol DGE. DEO is its US ADR listing on the NYSE. DEO has a 5-year US dividend history which has been affected by exchange rates. In the UK it is a 15-year Dividend Contender.
Its dividend is paid using the common UK bi-annual schedule which pays a smaller interim payment and larger final dividend payment. The current dividend is $3.4 for a yield of 3%. The most recent increase to its interim payment was a nominal 0.15% but the larger final payment will not be declared for some time. In US terms, the annual dividend increase over the last 5 years is 9%. DEO’s FCF payout ratio is 86%; this is an improvement from last year’s 115% and returns back to 2013 levels.
DEO’s P/E of 24.8 is higher than the S&P average of 19.5 and the current value this year is closer to more typical levels relative to the S&P than 2014’s premium. The 5 year projected EPS growth is 5.4%.
Free Cash Flow has been positive for each of the last 10 years with a low of £1.2B in 2008 and a high of £1.9B in 2010. The TTM value is currently £1.5B
Here’s the result of my initial screening from my watchlist. This checks for basic levels of yield, growth, dividend history and payout ratio. It also includes growth estimates and a relative comparison of projected income assuming current yield and future growth rates. Other factors such as Credit Rating & dividend schedule stability get factored into a numeric score to help in comparing between stocks.
All 7 companies listed pass initial screening. GIS scores lower than the other companies due to an irregular dividend payment schedule and a shorter dividend growth history. DEO also scores lower due to a 13-year dividend growth history and higher payout ratio. The other companies are all fairly equal.
My purchases this week
I decided to go with both PG and KO for my Sharebuilder purchase this week. Both companies face headwinds as they turn things around but I believe they’re still good to hold for the long-term. KMB seems over-valued to me and while KO isn’t a bargain either, its value is more reasonable. I’d like CLX and GIS more at lower prices.
Total purchases this week are:
- 2.4324 shares of PG @ 82.2 ($200)
- 2.4375 shares of KO @ 41.0 ($100)
With an average 3.1% yield, these purchases should increase my yearly dividend income by about $9.3.
Full disclosure: I am long PG, KMB, KO, GIS & CLX.
Quote of the day
Most of us regard good luck as our right, and bad luck as a betrayal of that right.