Many investors are attracted to consumer staples stocks because these businesses tend to perform well regardless of broader market trends. After all, recessions devastate demand for expensive discretionary products like automobiles and homes. But consumers don't easily change their purchasing habits when it comes to their favorite toothpastes, shaving creams, and paper towels.
Below, we'll highlight a few important metrics to watch when evaluating consumer staples stocks and look at why Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Colgate-Palmolive (NYSE:CL) deserve a spot on your 2017 watch list.
Johnson & Johnson for diversity
Johnson & Johnson dominates a wide range of markets in the healthcare industry, which makes the blue chip titan a great choice for investors who value diversity. Its consumer staples segment is anchored by global brands like Listerine mouthwash, Neutrogena skin care products, and Tylenol painkillers.
That portfolio of franchises bounced along at near-zero growth in a weak overall market last quarter, but Johnson & Johnson still managed healthy overall gains thanks to contributions from its other main business lines, medical devices and pharmaceuticals.
To see why this stock has trounced peers over the long term, investors can simply check its dedication to innovation. Backed up by a $9 billion annual research and development budget, Johnson & Johnson directs more resources toward its pipeline of drugs and consumer products than almost any other company could hope to spend.
The healthcare giant expects to boost organic sales by 4% to 5% in 2017 while its earnings grow by as much as 8% to $7.27 per share. Toss in a hefty 2.6% dividend yield, and investors should be looking at double-digit total returns this year.
Procter & Gamble for turnaround hopes
Procter & Gamble owns many of the biggest consumer brands in the world, including Gillette, which dominates the market for razors and blades with an incredible 65% share. Yet that figure is down from 70% just a few years ago as P&G has struggled against rising competition both from cheaper in-store brands and from disruptive business models like Unilever's online-based Dollar Shave Club.
Investors buying the stock today have good reason to expect a brightening overall picture, though, given that P&G has posted two straight quarters of surprisingly strong sales growth paired with improving profitability.
Its new, more targeted product portfolio might be just what the company needs to get back to market-beating sales and earnings gains likely beginning in the back half of 2017 and into 2018. In the meantime, shareholders stand to benefit from one of the most generous cash return programs around -- including $22 billion of dividends and stock repurchases this year alone.
Colgate-Palmolive for profitability
Some investors may have written Colgate-Palmolive off following a fiscal 2016 that saw revenue decline 5%. However, look closer and you'll see a business that's as strong as it has ever been.
Organic sales, which strip out currency swings and exited business lines, jumped by 4% last year compared to 2% for Kimberly-Clark and 1% for P&G. Colgate also increased its dominant hold on the toothpaste industry, with global market share ticking up to 35.5% from 35.3%. Its U.S. lead rose by the same amount to an incredible 41.4% of the market.
The most impressive metric in Colgate's arsenal is profitability, though. Operating margin is well over 20% of sales to put the company at the top of its industry:
Different characteristics of each of these stocks may appeal to different types of investors. P&G's 3% dividend yield, for example, makes it especially attractive to income investors when compared to Colgate's 2.2% or Johnson & Johnson's 2.6%. On the other hand, growth fans would likely prefer Johnson & Johnson thanks to the boost it gets from pharmaceutical hits.
But all three companies have demonstrated that their businesses can navigate weak industry trends. In that way, they exemplify the best of the consumer staples sector: Steady, highly profitable revenue growth that helps fund continued market-share gains and increasing cash returns to investors.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool recommends Kimberly-Clark and Unilever. The Motley Fool has a disclosure policy.