Why These 3 Consumer Stocks Are Good Picks, Despite Lofty Valuations

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The stock market continues to break new all-time highs, seemingly by the day. As a result, it's easy to understand investors who may be reluctant to commit new capital to markets at such high levels. The S&P 500 index carries a trailing price-to-earnings multiple in the high teens, and some of the market's most well-known stocks hold valuations even higher than that.

The consumer staples sector is home to some of the market's premier dividend-paying stocks, such as Procter & Gamble (NYSE: PG  ) , Clorox (NYSE: CLX  ) , and Colgate-Palmolive (NYSE: CL  ) . In fact, these stocks hold valuation multiples in excess of the broader market, but their world-class brand strength provides a meaningful margin of safety. This means skittish investors still have plenty of reason to buy these great stocks.

Great brands are a margin of safety
Procter & Gamble's stable of high-quality brands collectively brought more than $80 billion in sales into the company's coffers last year. A few of these fantastic brands include Bounty paper towels, Pampers diapers, Tide laundry detergent, Gillette razors, and Crest toothpaste. P&G points investors to its 50 leadership brands, which cumulatively account for 90% of the company's products. Twenty-five of these 50 brands generate more than $1 billion in annual sales each.

Clorox is most widely known for its namesake bleach, but it has an array of products that hold leadership positions in their respective categories. Clorox recently celebrated its 100th anniversary, and along the way it has built its own portfolio of popular products. Its core brands include its namesake bleach as well as Pine-Sol, Kingsford, Glad, and Hidden Valley. In all, nearly 90% of Clorox brands hold the No. 1 or No. 2 market-share positions in their respective categories.

Colgate-Palmolive doesn't have as much of a diversified business model as either P&G or Clorox, but it still provides investors with strong brands that have a global reach. Colgate toothpaste and Palmolive soap products are its most universally recognized brands. Colgate toothpaste holds the No. 1 market-share position in 146 countries across the globe. Of the company's soap products, Colgate holds the No. 1 position in liquid hand soap and the No. 2 position worldwide in bar soaps.

Dividend track records provide an additional layer of safety
Investor fears should be calmed even more by the fact that these companies have long and well-established track records of increasing dividends. Shareholders have been enriched over the past several decades, thanks to the fact that consumer products are bought year in and year out, regardless of the overall economy.

Consider that Procter & Gamble has paid uninterrupted dividends for an amazing 123 years in a row, every year since its incorporation all the way back in 1890. Furthermore, P&G has increased its dividend for 57 years in a row. Almost as impressive, Colgate-Palmolive has an enviable dividend streak itself: The company has paid uninterrupted dividends since 1895. Meanwhile, Clorox recently raised its dividend for the 36th consecutive year.

Don't be scared off by lofty valuations
It's understandable to instinctively avoid buying stocks in light of the massive market rally seen in the past year. Even when it comes to world-class companies like P&G, Clorox, and Colgate-Palmolive, risk-averse investors may be scared off by the fact that each stock holds a valuation multiple at or above that of the broader market.

However, it's also true that these great companies offer investors access to strong brands that are used in both good economies and bad. This in itself represents a margin of safety. And, thanks to these companies' strong track records of paying and raising dividends every year, investors don't need to be scared off just because of their earnings multiples. As a result, Procter & Gamble, Clorox, and Colgate-Palmolive can still be bought and held with confidence. 

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Related Tickers

5/25/2016 4:00 PM
CL $70.67 Down -0.20 -0.28%
Colgate-Palmolive CAPS Rating: ****
CLX $129.36 Down -0.71 -0.55%
The Clorox Company CAPS Rating: ****
PG $81.48 Up +0.51 +0.63%
Procter & Gamble CAPS Rating: ****