I’ll be taking another step towards Independence on Tuesday as I look to add to my portfolio with Consumer Defensive dividend stocks. This sector has the lowest weight in my dividend stock Portfolio and the sector contains some great dividend paying companies so I’m onboard to go shopping.
Consumer Defensive sector
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.
Here’s my portfolio as of 04-July grouped by market sector. Consumer Defensive is my lowest valued sector and it, along with the Industrials and Energy sectors, is outside the +/- 10% rule I made.
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 $32B. 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 3.0%. 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 53% is the nearly 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 about 12.3%.
Its P/E of 19.4 is slightly lower than the industry average of 19.9 and 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 6.5%.
S&P Capital’s 12-month target price is $51.00 with a fair value of $48.90 and it rates a Hold with 3 stars. Morningstar rates it similarly with 3 stars.
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 $212B. 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 3.2%. Its current Payout Ratio peaked in 2012 at 68% and is currently 64%, higher than last year’s 59%. The dividend growth over the last 5 years is an annualized 8.1%.
PG has a lower valuation than its industry with 21.3 vs 22.3 and it’s higher than the S&P average of 19.6. 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 7.7%.
S&P Capital’s 12-month target price is $88.00 with a fair value of $71.50 and it rates a Hold with 3 stars. Morningstar rates it higher at 4 stars.
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 $185B 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 2.9%. Payout Ratio is increasing and is currently 60.9%; although still lower than its highest value of the last 10 years in 2008 when it reached 61.2%. Annualized Dividend growth over the last 5 years is 8.3%.
KO’s P/E is slightly higher than its industry average with 22.4 compared to 21.4, 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 and so far this year it’s been pulling away from the S&P average compared to last year. Its projected EPS growth over the next 5 years is 6.7%.
S&P Capital’s 12-month target price is $43.00 with a fair value of $34.70 and it rates a Hold with 3 stars. Morningstar also rates it 3 stars.
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 58.6%, down from its all-time high of 20% in 2011. Annualized dividend growth over the last 5 years is 7%.
With a P/E of 20, it beats its industry average of 22.6 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 more than the S&P in a similar way to Coca-Cola. Its projected EPS growth over the next 5 years is 6.9%.
S&P Capital’s 12-month target price is $102.00 with a fair value of $101.20 and it rates a Sell with 2 stars. Morningstar also rates it over-valued with 2 stars.
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 $12B.
TAP has increased its dividend by an annualized 10% over the last 5 years, however last year it did not increase dividends. Payout Ratio over the last ten years ranges from 15 to 44% and the current ratio of 35% is below the highest level of 44$ from 2005.
TAP’s P/E of 19.5 is significantly higher than the industry average of 13.9 and also higher than the S&P’s average of 18.6. It has a 10 year P/E history similar to KMB in that it’s typically higher than the S&P average except for 2009 and 2010 and has increased more than the S&P’s average this year.
S&P Capital’s 12-month target price is $68.00 with a fair value of $63.30 and it rates a Hold with 3 stars. Morningstar also rates it over-valued with 2 stars.
Choosing new stocks to consider
I already have 5 stocks in this sector in my portfolio, so I’ve decided not to look outside my portfolio this time.
What to buy?
Looking at the 5 stocks , my criteria of requiring a 5 year dividend growth history eliminates increasing my current holdings in TAP from the start. TAP did not increase dividends in 2013 although it did increase them again this year. For that reason, it gets to stand in the corner while I consider to sell this position or not.
The remaining 4 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 2.9 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 as the most valuable, closely followed by PG then KMB and lastly KO.
However KMB, KO and PG all gained extra credit for consistently increasing their dividends over the last 5 years (KMB and KO every March, PG every April). GIS wasn’t as consistent and changed its pattern of increases last year). The reason I think this is valuable as it shows me management’s commitment to dividends such that they make and follow a long term plan.
Putting it all together, I’ve decided to increase my current position in PG after looking at each of the 4 eligible stocks.
GIS ranked lowest of the four because of its smaller growth, inconsistent dividend history and shorter dividend growth history although it had the highest estimated dividend payment in 5 years’ time. KMB was in third place, losing out to KO due to its shorter dividend history; it was fairly equivalent otherwise. PG scored highest with an awesome dividend history and track record along with the highest dividend yield of all 4.
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.
Update: I’ve included a graph showing the history of the PG dividend yield over time. Rather than know just the 5 year average I wanted to see if there was any trend over time and how the dividend increases affected it. Gray vertical lines in the chart represent the date of dividend increases so there’s typically a corresponding yield increase at that time.
Dividend yield decreases as price increases, and vice-versa, so the current dividend yield looks fair value at this time against the historical 5 year average value of 3.14%.
My purchases this week
So total purchases this week will be:
- $330 Individual Stocks (PG)
This purchase should increase my yearly dividend income by about $11.
Full disclosure: I am long TAP, GIS, KMB, KO & PG.
Quote of the day
It is never too late to be what you might have been.