Stick With Consumer Staples

"History does not repeat itself. But it does rhyme."

Armed with the above wisdom of Mark Twain, I've been reviewing S&P 500 sector performance throughout 2009 to get a deeper, more complete insight on stock market conditions. In part, I'm trying to compare the market's current reaction to its performance during the last big bear market, from 2000 to 2002. As a result, I've discovered one sector that seems better-protected than any other against the ravages of a gloomy economy.

Role reversals
So far, I've found one big difference between this bear market and the last: which industries are playing the roles of hero and villain. Last time, we were pulled down by technology; the likes of JDS Uniphase (Nasdaq: JDSU  ) , Micron Technologies (NYSE: MU  ) , and many others fell from their incredible valuations, dragging down the market with them. This time around, banks like Citigroup (NYSE: C  ) and friends are the main culprits, and as the leading sector so far in 2009, tech stocks are now the good guys.

In addition, back at the turn of the millennium, we had better places to hide our money away, even only on a relative basis. This time around, unprecedented withdrawals -- both from institutions like hedge funds and mutual funds and individual investors --left all sectors down by double-digit percentage points in 2008.

The best, relatively speaking
Last year, one sector fell a lot less than the rest of the market: consumer staples. It dropped less than 15% on a total-return basis, compared to a 37% drop for the S&P 500 on the whole.

Since the U.S. consumer's newfound frugality is a watershed event -- unemployment is high by historical standards (and still rising), home prices have rapidly deteriorated, and pension plans have been decimated -- consumer staples are a smart place for investment dollars. This is especially true now, as the summer, not known for being kind to stocks, brings so much uncertainty.

Four consumer-staple stocks I've reviewed this year -- and still like -- are Altria (NYSE: MO  ) , Reynolds American (NYSE: RAI  ) , Safeway (NYSE: SWY  ) , and SYSCO (NYSE: SYY  ) . I like their stable cash flows and good dividends, qualities which are rapidly making them endangered species in the current investment environment. S&P 500 companies on average had a 397% payout ratio in the first quarter, up from 191% in 2008. Clearly, such payout ratios are unsustainable, as our recent glut of dividend cuts makes clear.

Fortified by products that people buy again and again, consumer staples are better-positioned against dividend cuts (though they are certainly not invincible). That matters a lot: According to S&P, 44% of the 9.51% average annual return of the S&P 500 since January 1926 has come from dividends.

Ponder that the next time you're looking at an investment that pays none.

More on market issues:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. SYSCO is a Motley Fool Income Investor recommendation and a Motley Fool Inside Value pick. The Fool has a disclosure policy.


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  • Report this Comment On July 14, 2009, at 8:55 PM, weiwentg wrote:

    Of the four stocks mentioned, I would recommend Sysco. The tobacco companies are at the mercy of regulators - which is good, but not necessarily for investors. Safeway has too much competition and doesn't have an economic moat. Sysco has, I think, a wide moat.

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