Major packaged food makers usually bounce back from market downturns, since consumers generally keep buying their products regardless of economic conditions. So with the market hovering at frothy levels, it might be wise to take a fresh look at three stalwarts of that industry -- PepsiCo (NYSE:PEP), Mondelez (NASDAQ:MDLZ), and General Mills (NYSE:GIS).
PepsiCo sells a wide selection of carbonated drinks, juices, teas, sports drinks, bottled water, Quaker packaged foods, and Frito Lay snacks across 22 billion-dollar brands. This makes it a more diversified play than its main rival Coca-Cola (NYSE:KO), which doesn't sell any packaged foods.
Like Coca-Cola, PepsiCo faces slumping soda consumption, which has consistently declined for over a decade in the U.S. and other major markets. However, PepsiCo is countering that decline with healthier versions of its drinks and packaged foods, and acquiring or creating new products for health-conscious consumers.
PepsiCo expects that shift, along with price hikes meant to offset weaker shipments, to lift its organic revenue -- which excludes foreign exchange impacts, acquisitions, divestments, and other charges -- by "at least" 3% this year. Its core earnings, which exclude the same items, are expected to rise 8%. PepsiCo also pays a forward dividend yield of 2.9%, which is supported by a payout ratio of 65%. PepsiCo has hiked that payout every year for the past 44 years. Its P/E ratio of 25 also remains lower than its industry average of 27 -- which makes it a smart play for conservative income investors.
Mondelez's massive portfolio of sweet and savory snacks includes Oreo, Chips Ahoy, Ritz, Nabisco, Toblerone, and Cadbury. However, the company's growth has been anemic in recent quarters due to macro headwinds in certain countries, more health-conscious consumers, and tough currency headwinds.
That's why Mondelez's organic revenue rose just 0.6% annually last quarter, as price hikes barely offset declining shipments. For the full year, Mondelez expects its organic revenue to rise "at least" 1%. Its earnings are expected to improve by the "double digits" as its margins expand with divestments and cost-cutting strategies.
Mondelez pays a forward dividend yield of 1.7%, which is supported by a payout ratio of 67%. It's raised that dividend annually ever since it introduced it in late 2012. Mondelez's P/E of 40 is higher than its industry average of 38, but that premium could be justified by expectations for the company's future changes.
Mondelez currently faces pressure from two activist investors -- Trian Fund Management's Nelson Peltz and Pershing Square's Bill Ackman -- to divest weaker brands, attempt new market strategies, acquire smaller companies, or sell itself. There's already been plenty of drama on that front -- Mondelez tried (but failed) to buy Hershey last year, while ongoing rumors suggest that Kraft Heinz or another packaged foods giant could buy the company.
General Mills' packaged foods portfolio includes breakfast cereals like Cheerios, baking products like Bisquick and Betty Crocker, Haagen-Dazs ice cream, Yoplait yogurt, Green Giant vegetables, and a wide variety of pastas, pizzas, soups, snacks, and spices. Like PepsiCo, General Mills is pivoting is business toward healthier organic products. That's why it bought organic foods giant Annie's for $820 million in 2014.
Unfortunately, General Mills' growth remains poor, due to the ongoing weakness of its cereal business and softness in the North America, Asia, and Latin America markets. Its organic sales fell 5% during the first nine months of fiscal 2017, and it anticipates a 4% decline for the full year. Adjusted earnings, lifted by buybacks, are expected to grow 5% to 7%.
Those numbers sound dismal, but the bearishness on General Mills has made it a decent income play. The stock trades at 21 times earnings, compared to the industry average of 29, and it pays a forward dividend yield of 3.4% -- which is easily supported by a payout ratio of 70%. It's also raised that payout annually for 13 straight years. To top it off, there's been buzz about the company being acquired by a bigger suitor -- which would certainly breathe fresh life into this aging stalwart.
But should you buy these three stocks?
Growth-oriented investors will likely pass on PepsiCo, Mondelez, and General Mills. But conservative income investors looking for defensive plays in a frothy market should probably keep all three stocks on their long-term watchlists.