Procter & Gamble (NYSE:PG) -- the maker of household brands Tide, Bounty, Pampers, Crest, Charmin, and Gillette -- is often considered a classic dividend play because it's hiked its dividend annually for six decades. P&G currently pays a forward yield of 3.1%, which is supported by a payout ratio of 75%.
However, P&G also trades at 25 times earnings, which is higher than the industry average of 20 for personal products companies and the S&P 500's multiple of 24. That's likely due to low interest rates pushing income investors from bonds to stocks over the past few years. Since P&G is a classic blue chip dividend play, its shares have soared nearly 50% over the past five years and stretched its valuations to frothy levels.
However, there are still reliable consumer staple stocks that offer higher yields than P&G and trade at lower valuations. Let's take a closer look at three stocks which fit that bill -- General Mills (NYSE:GIS), B&G Foods (NYSE:BGS), and Altria (NYSE:MO).
General Mills sells packaged foods like Cheerios, Betty Crocker, Haagen-Dazs, Yoplait, and a wide variety of pasta, pizzas, soups, snacks, and spices. In recent quarters, General Mills struggled with the ongoing weakness of its cereal business (as consumers shifted toward healthier or more exciting breakfast foods), as well as softness in its North America, Asia, and Latin America markets.
That's why its organic sales fell 5% during the first nine months of fiscal 2017, and it expects a 4% drop for the full year when it reports its year-end earnings on June 28. But its adjusted earnings, lifted by buybacks, are still expected to rise 5%-7%. General Mills looks weak today, but it's investing in healthier brands (like organic food maker Annie's) and divesting weaker brands, and the macro headwinds it faces overseas should gradually wane.
Until then, General Mills remains a cheap income stock. It pays a forward yield of 3.4%, which is supported by a payout ratio of 70%. It's raised that dividend annually for 13 straight years. The stock trades at 20 times earnings, which is lower than the average multiple of 29 for the packaged foods industry.
B&G Foods is a packaged foods company that has primarily grown through acquisitions. It acquired the Green Giant brand from General Mills in 2015, and sauce and condiments maker Victoria Foods and ACH Food Companies' spice business last year. To fund all those acquisitions, B&G announced two secondary offerings last year.
Analysts expect B&G Foods' revenue and earnings to respectively rise 19% and 5% this year, fueled by its recent acquisitions. After annual comparisons normalize, its revenue is expected to grow 1% next year, and its earnings are expected to rise 6%. Looking ahead, the main risk to B&G is that the company "diworsifies" its portfolio by accumulating too many brands.
But for now, it's a cheap income play. It pays a hefty forward yield of 5.1%, and it's raised that dividend annually for six straight years. Its earnings-based payout ratio currently exceeds 100% due to its recent acquisitions, but it only spent 92% of its free cash flow over the past 12 months on those payments -- so the dividend remains sustainable. B&G trades at 22 times earnings, which is well below the industry average of 29.
Last but not least, Altria -- the largest tobacco company in America -- pays a forward yield of 3.2%, which is supported by a payout ratio of 32%. That payout ratio is so low because Altria recently received a massive windfall from AB InBev's (NYSE:BUD) acquisition of SABMiller, which Altria held a major stake in.
That deal gave Altria a pre-tax gain of $13.7 billion, significantly boosting its earnings and reducing its trailing P/E to just 10 -- which is much lower than the industry average of 18 for tobacco companies. Wall Street expects Altria's revenue and earnings to respectively grow 2% and 8%, fueled by the strength of its flagship Marlboro cigarettes and low gas prices boosting consumer spending.
Altria can consistently grow its bottom line in the face of waning smoking rates because it repeatedly raises prices, cuts expenses, and buys back stock to offset weaker shipments. The company has also raised its dividend every year since it closed its spin-off of Philip Morris International in 2008.
The key takeaway
I'm not saying that P&G is a bad stock -- it's still a great long-term play for conservative investors. But the stock looks frothy at current levels, and investors who don't already own P&G might consider buying these other consumer staples plays, which have both higher yields and lower valuations.